A sequel to Riba in Banking

Rasheed Abdul Azeez

Riba today:

Interpretation of forbiddance being limited to interest of usurious kind, many among Muslim business community and the individuals dependent on the existing system, appear to favor this view without bothering to find the true nature of riba that could turn out to be unpalatable. Added to it is the perception that why rock the boat when it sails smoothly ringing-in profits? Overall, their response cannot be termed positive. So much for the Muslims involved in business, related services and employment.  Now, let’s look at the world scenario.

Saddling the global economy with none challenging it effectively, it rides unhindered. Money being treated as a commodity that can be lent rather than treated as a medium of exchange is the basic wrong that led to riba. This notion that money as a commodity can also be used as a material for profit has had far reaching effect on the world economy. All the social ills that emanated from riba can be traced back to this wrong. Whether the story of lending money for profit came about through gold smiths holds true or not, this system and capitalism appear to be made for each other.

More than the definition, the effect of capitalism that hurts the world population most is the classification of capitalist and the working class. It has created a class distinction that cannot be bridged unless its framework is restructured. Though the capitalists stand to take home the profits, the onus of supporting the economy falls on the working class. Being the largest segment in numbers, their spending power determines the strength of the economy, though taxes contribute to a lesser extent. Among the working class, the middle-income group forms a strong spending power whereas the low-income group face difficulties to make ends meet. When the economic theory itself is based on capitalism, remedial measures offered to remove the anomalies are mostly cosmetic. Added to the woes of income disparity, banking helps in accumulation of wealth into fewer hands that deepen the divide.

However, different dimensions and views to an issue are to be taken into consideration before deciding it as totally wrong. Capital is an essential component in business. One who owns it, expecting a return on his investment can neither be faulted nor blamed for not willing to share it with someone. This being a justifiable stand, the capitalist has the right to take what is legally his share from the profit proceeds. However, things do not stop there. Globally big investors though small in number, accumulate huge profits into their accounts that get converted to wealth at an unprecedented level. According to a 2013 survey conducted by Credit Suisse, nearly half of global wealth is held by less than 1% of the world population, a little more by the second rung investors who form less than 8% and about 23% holding less than 14% leaving a whopping 69% population with a meager 3% of the pie. (See accumulation of wealth into fewer hands in Riba in Banking). How did this miniscule number of people manage to corner so much? Unless the banking system lent them huge volume of money it wouldn’t have been possible.

Modern economics justifies lending for profit a legal activity. Not taking into account the misery that it can cause to the public at large, the situation proves mutually beneficial to banks and capitalists. Banking helps keep capital captive to the investor by eliminating the need for more number of investors to meet the need for more funds (contribution by corporates and share holding by large number of small investors not discounted). Thus investors’ interests are maintained by having control over the business, avoid dilution of ownership had it brought-in new investors and maintaining profit levels without being spread into a larger investor base. All this has a negative impact on the spread of wealth.

Rising poverty levels are mostly left unexplained, rather brushed aside as the result of poor political management. Instead, the developed economies are shown as the shining example of economic prosperity, pointing to the same banking system that is blamed as the cause for the miseries of the masses helping these economies. How can one part of the world become successful and the rest fall into misery following similar economic policies and banking practices, we are asked. It is argued that there must be extraneous factors that lead to the down turn in the under-developed ones. The economic woes of the majority world population is blamed on under-development, politics, corrupt administration and over-population that brings in its wake poor sanitation, unemployment, neglected health-care sector, etc. Though undeniable that these factors do contribute to the sad state of affairs, the one factor that is the main cause of the catastrophe is never brought to light.

We must not forget the fact that all the surplus and deficit economies exist on this globe, which is undeniably a closed economy. With nowhere to export and import from, the world economy has to necessarily depend on its available resources.  The surplus position of some nations are thus at the expense of the deficit ones. Reasons for success or failure may be kept out now at this point. The real issue is how banks have helped in the economic wellbeing of the surplus ones. If it was providing finance to build the economy, then the question remains whether the bank is the lone agent who holds all the resources. That being not the case, their relevance is reduced merely to that of an intermediary. Even in the absence of the banking system, the money would still have come from small time investors. The difference would have been the profit sharing; instead of it concentrated within fewer hands, it would have spread to the larger populace. The banks’ share of profit eliminated, cost would have come down by as much.

Even in surplus economies, monetary inflation that drives prices up bring workers on to the streets demanding higher wages from time to time. This situation is due to the shrinking money value caused by monetary inflation. Though it doesn’t affect the surplus economies as much as the deficit ones, the effect is still felt and undoubtedly the result of banking practices.

Better economic conditions help cushion the impact of negative effects. In the case of rest of the global population, they do not have these cushions to soften the impact. Adding to their miseries are higher population levels with low employment and poor educational standards. All these and other factors being cited as real cause of rising poverty are more in the nature of contributory factors resulting from economic woes perpetrated by the combined effects of banking and capitalism.

Presently, the sheen on developed economies shows signs of fading. Drop in exports result in falling income levels that initially affect workers’ emoluments and later in loss of jobs. The impact of economic slow-down is better reflected in the drop in spending power. As said earlier, economy is supported by the spending capacity of the masses, the majority of whom form the workforce. However rich the miniscule high-income groups are, their purchasing power cannot support the falling economy as spending on luxury goods does not form its backbone. On the other hand the monetary inflation spurred high cost of living index becomes a stumbling block to stage an economic recovery as drop in sales of luxury goods drag the growth figures down further.

Falling or stagnant growth figures and rising unemployment in some developed economies are indication of the shape of things to come. Growth rates have become poor falling to the level of 1 to 2%. It points to the fact that they also are vulnerable. The claim of banks helping in economic growth in developed countries, thus, does not hold water.

Consequent to these anomalies, the majority population in the rest of the world is suffering. Like the ecological imbalance, economic one also will have its natural consequences. Creating barriers and restriction of movements cannot help beyond a limit.

Another important aspect of shunning interest-based system is freedom from the forced economic policies imposed by some lending institutions. Without dependence over such borrowings, framing of economic policies of the budding economies would be free from diktats resulting in attention being given on the basic strength of the local economy. For instance, an agrarian economy can lay emphasis on its expansion than the economic model advocated by outsider lending agencies. Chances of unreasonable terms on exploitation of local resources would also be discouraged that usually arise when debt traps force the under developed and developing economies into agreement.

 Economics in Islamic perspective:

Any system that lays claim to drive the economy in a just manner cannot be identified with characteristics as described above. It should possess the ability to identify and provide resources in the most beneficial way to mankind. As it encompasses the basic necessities such as food, clothing and shelter for survival of humanity, economic activity should be aimed at achieving them in the best possible manner at an affordable cost and acceptable quality. Whether owned by private, public or state, it must be committed to operate on just principles.

Let us pause here to compare the two systems. Basically running on the same premise that of capital contributing to set up business, they part ways where the question of riba comes. As an alternative to riba, Islamic system depends totally on shareholders’ investments to run the business. Capitalism can, more often than not, be seen using the banking to bridge their financial needs. With the restrictive profit sharing policy, capitalism sucks the money out of the system by accumulation of wealth in fewer hands, whereas Islamic system expands the wealth base among the population by allowing direct participation in investment and profit sharing.

Now let us take a look at the Islamic economics. In a nutshell, Islam’s economics can be described as the one and only system that stands apart when interest based dealings are concerned. Its approach is unique by the equitable values providing opportunity to everyone not just symbolically but structurally too. In contrast to the top-heavy capitalism, Islam offers a system that justifies the way the pyramids are built symbolizing stability. A top-heavy structure is prone to collapse whereas a strong base lends strength. Prophet Muhammad (SAWS) set an example of this principle the way he lived. He gave away everything to his followers helping them build a society that had a strong economic base of sharing and caring.

The need to expand the wealth base cannot be achieved without being just in all matters. Justice occupies a prominent place in Islam. Its two constituents are equality and freedom. Basic principle of equality stems from origin of humanity. The following verse explains it:

“O mankind! We have created you from a male and a female, and made into nations and tribes that you may know one another. Verily, the most honorable of you with Allah is that (believer) who has At-Taqwa. Verily, Allah is All-Knowing, All-Aware.” (Surah 49, Al-Hujurat. Verse :13) (Tafsir Ibn Qathir).

Hadith:

The Messenger of Allah (SAWS) later gave a speech while riding Al-Qaswa’ and said, after thanking Allah the Exalted and praising Him as He should be praised:

“O people! Allah the Exalted has removed from you the slogans of Jahiliyyah and its tradition of honoring forefathers. Men are of two types, a man who is righteous, fearful of Allah and honorable to Allah, or a man who is vicious miserable and little to Allah, the Exalted. Verily, Allah the Exalted and most Honorable said, “O mankind! We have created you from a male and a female, and made you into nations and tribes, that you may know one another. Verily, the most honorable of you with Allah is that (believer) who has At-Taqwa. Verily, Allah is All-Knowing, All-Aware.”

The Prophet (SAWS) said:

“I say this and invoke Allah for forgiveness for me and for you.” (Al-Bukhari, An-Nasai and Ibn-Majah. Quoted in Tafsir Ibn Kathir. [Abridged]. Volume-9).

“All mankind is from Adam and Eve, an Arab has no superiority over a non-Arab nor a non-Arab has any superiority over an Arab; also a white has no superiority over black nor does a black have any superiority over white except by piety and good action. Learn that every Muslim is a brother to every Muslim and that Muslims constitute one brotherhood.” (Reported by At-Tirmidhi).

Defined as the state of being equal, it has synonyms as: fairness, impartiality, equal opportunities, etc. When it comes to freedom, it can be summed up as ‘being free to act or change without constraint.[1]

Freedom in Islamic perspective is contextual and practical. In relation to Allah (SWT) and His creations, it is that of The Master and slaves where freewill is limited to thought and intent. Even translation of intent into action is subject to His Will. When it comes to relationship between humans and other creations, humans are termed as Khalifa who must implement the Creator’s law, where freedom to act lies within this framework. Between humans, it is of utmost importance and comes under muamalat (dealings). Personal freedom is restricted to one’s own area of activity. Stepping beyond it is infringement of others’ rights. In matters of dealings, freedom is subject to justice. Those who transgress are termed Dhalimoon (unjust, oppressors). Gender equations also are contextual. In certain matters it may appear unjust and in some cases infringement upon freedom. On closer study the wisdom behind it will prove to be just. In totality, freedom is not applicable at will, but by the Will of Allah (SWT).  Upholding rights is an act of freedom which otherwise will become oppression. The word freedom that is being bandied about today is more of a concept than reality. In it, pitfalls are many. Acting without responsibility leads to anarchy that result in chaos.

Equality being a quality needs freedom to qualify as equal. Considering another as equal also necessitates similar quality in both. Thus equality and freedom are inseparable factors in goodness.

Equality and freedom should create an environment of empowerment to the members of a society or group. Deliverance of justice thus becomes effective without which it might remain just an ideal. By definition ‘the term empowerment refers to measures designed to increase the degree of autonomy and self-determination in people and in communities in order to enable them to represent their interests in a responsible and self-determined way, acting on their own authority. It is the process of becoming stronger and more confident, especially in controlling one’s life and claiming one’s rights’.[2]

The alternative:

Looking at alternative economic systems, there have not been many to choose from. After the industrial revolution, it has been capitalism all the way except in some economies where socialistic ideals came into practice as an alternative to the lopsided growth of wealth. Though the disparity resulted in a socialist upheaval that found the solution in replacing private holding, with the state owning and controlling all economic activities that came to be known as socialism and its critics terming it state capitalism. However, with the Soviet bloc crumbling, Berlin wall collapsed and China becoming more of a market oriented economy, socialist economics is limited to fewer pockets. Most of the world economy functions under capitalist principles leaving some space in the make-up of its functioning by becoming worker friendly aimed at their welfare.

Ideally, workers’ rights should become effective when their representation is validated through participation in decision-making. Today, the socialistic ethos on representation mostly works through trade unionism. Sadly it portrays more of a class struggle than participatory effort to find common ground. The situation demands representation through voting rights. While it is of paramount importance not to let the economy into turmoil, equality can be achieved through a solution that would allow capital to continue as the mainstay with all concerned coming on board with equity.

For justice to prevail we must have tools to protect our rights. Power is one such tool that helps us exercise our rights. And true power comes from freedom to exercise one’s rights. It is the right to participate in decision making process and seeing that it is implemented. Participation in decision-making may come through legislation or by shareholding. Legislation needs government intervention that may not be easy to come by. The alternative is participation through shareholding. Not the kind that does not allow one to play the part of a decision maker, but a forum where the collective voice of the society is heard and acted upon for the wellbeing of all involved. This is far from the romantic ideal of freedom that finds expression in trivialities.

Here should step-in Islam’s economics. Long forgotten and absent from practice among majority Muslims, it has not been in contention in recent times except in the verses of the Qur’an and the Prophetic traditions finding voice through the scholars who keep reminding the masses of its need to be followed. Lost in the vociferous defense of bank lending by its proponents and a few among the scholars lending support to legalizing it, practice of Islamic economics has been confined to a few places among smaller groups in the form of interest free lending.

While it cannot be expected of an economy steeped in riba to declare itself interest free overnight, considering the web of banking network that it is connected to and the international trade that takes place through it, first the alternative system is to be set-up that functions free from the existing one. Thus it becomes an effort from the grassroots though its function cannot be cut-off from the economy until it is able to run on its own steam.

Some important hurdles need mention here before we proceed further.  Lack of willingness to share is an important factor. Fuelled by the lure provided by banks through lending, businessmen are reluctant to take-in partners/shareholders who would take away part of the profits.

Others are largely political that does not encourage an alternative system coming into existence.  Unfavorable legislations that lay obstacles in various countries dissuade even those who ardently wish to pursue the true path. This is particularly evident when it comes to establishing a financial institution, as most Muslims look towards an interest free bank as the only solution. Unaware of the intricacies involved in running a financial institution, they fancy a namesake setup that would solve the interest problem.   Though far from the ideal, a banking system though attractive in appearance, creates more hurdles than solutions. A banking license is impossible to obtain when it proscribes the established norm of interest system. World over, the banking system revolves on its axis; that is interest. Replacing it with anything else is to give it a whole new character. Investing on profit sharing basis is the perceived alternative. More on the lines of investment banking system, though in practice in some places, it has not found favor in general.

In the present times, geographical and political conditions too play their part in making things difficult for Muslims to adhere to the rule. Riba based system is in force in most countries, irrespective of whether they follow Shariah in whole or part. Similar is the case with Muslim majority lands. Countries with large Muslim population that follow secular order also exist. With the central banks in these countries holding reins of money matters, establishment of an ideal alternative in the form of a financial institution is a challenge that is yet to overcome.  A compromise system is all that can be expected to function.

Islam doesn’t demand financial institutions to be the alternative. Rather, the emphasis is on promoting trading models. An investment banking system may meet certain criteria, but the challenges are enormous compared to a trading outfit that will suit the need of an alternative. Leaving the practice of borrowing behind, direct participation in the economy is the alternative to funding and working capital requirements. Based on the profit and loss sharing formula, Prophet Muhammad (SAWS) identified Mudarabah and Musharakah systems to replace riba. The first deals with a contract based business arrangement between two parties, the investor and the business manager. Mudarrib (business manager) is a person skilled in business but without financial resources whereas the investor is without business acumen and remains a silent partner. Profits are shared between these two on a yearly basis. All forms of assets belong to the silent partner. In the event of loss, the investor has to bear it. The other system, Musharakah, has every investor eligible to be active in its functioning. Without a Mudarrib, profits are shared and losses are borne by all. These two systems are the alternatives.

However, in countries where Islamic banking is not allowed, clamor for a non-interest based banking system goes on unabated. Those who fancy an interest free commercial banking system as the solution are largely ignorant of the pitfalls that lie ahead. Though there are many other problems that an Islamic bank has to face, Fractional Reserve Banking (FRB) can be one. (Shown as an example here as it has already been discussed in detail). It is practiced by most of the banks. (For details see Riba in Banking). Islam cannot be expected to adopt such an unethical practice. But profit generated from it is so enormous that it cannot be ignored too. In addition, FRB comes in handy when large loans turn bad. FRB generated profits replace the loss fairly quickly to stabilize the situation. In the absence of such a convenient method, Islamic financial institutions, when in loss, have to either shut shop or lose its face when they are unable to meet the withdrawal demands. While commercial banks have the option of bailout by the central bank or bail-in by refusing to pay-up the account holders, Islamic banks cannot fall back on them. Any bank that runs truly on Islamic principles cannot resort to neither as both are inimical to the interest of the public at large.

Investment banking as another option has to work within the framework of mudarabah. However, in the present times the investors’ priority is on safeguarding their contributions first. The total trust the mudarrib enjoys has come under criticism where accountability is absent.[3] The Islamic banks that are neither purely investment institutions nor totally commercial, are facing this situation as they operate in it on a fairly large scale. This is just the tip of the iceberg. Read the article under reference to learn more.

Though there can be safeguards built into the system like representation by the investment bank on the board of its invested venture, it goes out of the principles of mudarabah. The other alternative being musharakah, the financial institution turns itself into a trading or manufacturing company where its shareholders are active participants. There the banking label will remain without any function attributable to banking. Still, if the idea is to be pursued, an Islamic government has to come forward to help set up an investment banking system of retail nature. If not, the only option is to join the ranks of investment banks that function under the capitalist system. You cannot set terms of Islam there.

As for the manufacturing or trading ventures, they are not constrained by any of the abovementioned problems. They are not in need of a banking license. The investors are shareholders and active in its operations. Anyone can become a shareholder if they agree to follow the Islamic economic principles of fairness and sharing. Risk level is not beyond the normal seen in businesses elsewhere. However, certain benefits that an Islamic economy can offer may be missing while functioning in a capitalist environment. They will be discussed in detail later in this study.

While businesses based on Islamic principles of direct public participation in trade or industry is not highly visible, there may appear certain similar ones that can be cited. Total investment being brought from own sources like co-operatives whose capital is based on members’ share value, venture capitals and mutual funds that generate capital from own sources also are comparable in capital formation.  However, similarities end there. When it comes to conditions they operate in, co-operatives extend their activities into banking too and freely indulge in credit based trading whereas venture capitals look for investments in profitable ventures irrespective of the line of business, whether it involves interest dealings or the venture itself may be based in haram (prohibited). Mutual funds too function on similar lines. These basic similarities are mentioned to remove the doubts lingering in peoples’ mind that there are systems that are comparable with Islamic ones. They are not. Similar is the case with the corporate sector.

Public limited companies in its basic approach are comparable with musharakah. But, the basic character does not sanctify its methods of function and policies. That is the reason behind leaving the behemoth public share holding corporate sector out of the list of comparable systems. Primarily it is evidently the culture of carrying the torch of riba in their activities that sets it against Islam. All that go against the grain of Islam’s approach of an equitable society is eroded by this sector. Few individuals holding majority world wealth made possible by this type of enterprise with the help of commercial banking system is the single-most causative factor of rising poverty levels. From the impetuous market sentiments ruling the value of shares that allow a few to do profit bookings to the impervious policies that reflect scant respect for the social good, it can never be compared to the pristine Islamic values.

Before concluding this subject, a word of caution and a sad fact that needs mention here is the practice of fleecing ignorant Muslims by some criminal elements of the society. They project a mudarabah kind of business model offering attractive return on investment and some add guaranteed minimum returns. These fly-by-night operators use the Islamic financial system to their advantage to lure Muslims to part with their hard earned savings and leave them in the lurch. Ignorance and greed drive the masses into investing in such shady ventures. Islam does not guarantee return on investment, let alone in higher percentages. Knowledge of the religion and its values help us understand the correct path to be followed. Islam provides solutions, but under its own dispensation.

We have discussed above practices that may also go against purely Islamic principles. If we decide to adhere to the Islamic principles, we have to leave the quest for a mere banking label. Stick to the essence of Islam that is founded in truth. Islam’s economics cannot be viewed in isolation from Islam the religion. Principles that govern the religion form the basis for its economic system. Justice being central to its theme, emphasis is laid on it and built upon to cover necessary details. Subject under study being the micro-economic aspects, namely industry and trade, we will narrow it down to analyze those functions that come under its ambit.

The Islamic model:

Islam’s approach to the well being of mankind forms this part. Taking into consideration the prevailing economic conditions, attempt is made to find solutions that would entail better living conditions for the masses. Certain aspects that would generally apply to any kind of enterprise are discussed first. Points that influenced drawing a broad outline of the system are stated below:

  • Any alternative system must conform in totality to Islamic principles.
  • Though interest is the motive behind lending, its elimination alone would not solve all the problems that exist now due to cumulative effect of dealing in interest for centuries and the complex economic system. Accompanying problems such as inflation, dearth of investment opportunities and the deepening divide of wealth between the rich and the poor also are to be addressed.
  • Creation of investment opportunities that would lead to equitable distribution of wealth.
  • Provide opportunities to lesser privileged.
  • Opportunity to participate without fulfilling the initial capital requirement.
  • Employment is not an end but a means to direct participation.
  • Profitability will be consumption driven.

Opportunity to invest in business by all those interested ensures direct participation in the economic activity. What is meant by direct participation is the ability to be part of decision- making and its implementation. Investors being active participants, all transactions are above board.

Here, looking beyond banking comes into play. Fully subscribed project cost eliminates need for bank borrowings and credit-based trade. It goes without saying that the economy as a whole may continue to be credit dependent until it decides to free itself from the clutches of riba. In effect, the Islamic model will be a niche amidst the lending system, circumventing it to find a place for itself, comparable with an oasis in the midst of a desert. On the positive side, the first step of forbiddance of riba will automatically get implemented with those who participate in it. A direct entry into the economy with participation of all the elements, namely capital, labor and consumer would create a firm base to build upon.

On a larger scale the numerically major constituents left out of the profit sharing formula in capitalism, their rights not being treated justifiably, the solution to bring about a change cannot be expected to materialize easily. The system cannot simply be overhauled too. The bone of contention is money. Equity participation of all concerned, workers and the consumer, would give everyone the right to participate directly in the economy, voice their concerns and preferences that would have to be incorporated in the business policy and conduct.

Bringing-in favorable legislation for the smooth conduct of Islamic model of business in non-Islamic countries may show some variation, as discussed earlier. At the international level, though not necessarily shariah based, there are Islamic countries and Muslim majority ones too. Favorable legislation may be brought in there comparatively easily. Though it may not contain all the required provisions as shariah based, due to variation in their laws in force, by and large it can help overcome the difficulties in dealing in money matters involving riba. Similarly those who are willing to partially accommodate the ideals among the secular economies may also be helpful. In all, a uniform business model may elude globally. However, the first step of a riba free business can be achieved.

 

Some favorable conditions that could benefit the Islamic model, if established in an Islamic country that was referred to in ‘The alternative’ are as below:

  • Musharakah model:

It will be fashioned as a public limited shareholding entity established under Islamic principles. The law of the land may vary based on the type.

  • A special purpose vehicle:

Incorporation as a special purpose vehicle will be necessary, as it will not be listed as a public limited company offering shares through stock exchanges. Since issuance of shares will not be in accordance with the rules generally seen and to preserve its Islamic character, enacting suitable laws may require like minded governments to favorably act upon it and help the company run without hindrance. In this instance, at least initially it will be a sound move to set up these ventures in Islamic countries where sharia based law is in force. Muslim dominated economies having similar business systems may also find it easy to adapt to.

 

  • Lower tax burden:

 

Today we see heavy taxation, both direct and indirect, that gets added to the cost. Ultimately the consumer bears the burden. Since this model seeks to distribute the earnings within the society, multi-layered taxation goes against the purpose it is intended to. It would only help burden the consumer. Unlike governments trying to take care of the people through taxes collected, Islamic ventures take care of themselves. On the part of an Islamic government, an efficient Zakah system provides the necessary means to take care of the needy, which is not going to be the case in other economies. Additionally, the pricing mechanism assisted by profit sharing formula in the system will add to the well being of its members. Thus higher taxation does not serve the purpose that the other economies find necessary. Even if not totally tax free, minimal taxation would not harm the system.

In a nutshell, the basic necessities of setting-up an Islamic business model have been discussed. However, what is achieved here is avoiding the borrowing route. Fully subscribed capital is not a new idea and no government will force you to borrow from banks to set-up a business. Here, coming together of a number of shareholders is more important than the capital adequacy met. Since it cannot remain a lone entity, without interacting with the world around it, the venture is more likely to transact with businesses that deal in riba. It may get carried into the cost of raw materials or merchandise as the supplier could have incurred interest cost in his purchases that will automatically get transferred. Such unavoidable situations are beyond the control of the business unless the economy becomes riba free or a supply chain is built that adheres to the Islamic system. The endeavor should be to create such an economy. Until then the venture would have to satisfy itself with the limited success that it has achieved.

Daily banking transaction is another area of concern operating in an interest-based economy. To avoid interest involvement, it calls for creation of a wholly new system that is beyond the means of the model business. It needs a non-banking apparatus that will take care of the transaction and utilize the money in halal manner. A move that challenges the banking system is not likely to be initiated by a government. It will be viewed as an unnecessary and cumbersome exercise that neither benefits the government nor the economy. Such situations cannot be overcome unless the government to act is Islamic. Some measures that can be brought in to reduce the exposure would be to invest the cash balance in raw materials or goods. Since all business transactions are to be strictly cash based, there is likelihood that it may be quite a handful.

The purpose of drawing-up a project that could be successfully implemented is to convince the world and the fence sitters among Muslims that an alternative economic system could become a reality. The benefit that can accrue to the masses and how poverty can be effectively handled will show the infinite wisdom that has gone into fashioning the true religion.

The project:

A project that is unique by itself in character and easily adaptable in any situation, it assumes an important a position in human life like no other. Its uniqueness comes from certain aspects special to it. In general, no business can claim to have a dedicated clientele that keep coming back as food does. The daily need without which survival may be in question. The basic necessity of all living creations, food is the choicest of all things tradable. To identify our project, this basic necessity gets prioritized. The Qur’an guides us in the following verse:

“O mankind! Eat of that which is lawful and good on the earth, and follow not the footsteps of Shaytan (Satan). Verily, he is to you an open enemy.” (Chapter: 2 Al Baqarah, verse 168. Tafsir Ibn Kathir. Abridged. Volume: 1).

The permissibility is not based on lawful alone as the verse states Halalan Twayyiban (lawful and good). The concept thus gets fully justified as the project to be implemented first. Emphasis on not following Satan, the evil, is that he forbade what Allah (SWT) has permitted and made attractive the forbidden.

A retail food chain:

Retail being the last in the chain that links with the consumer, it is the obvious choice as the form of business to enter into. Today the retail scene has gone from the simple grocery outfit to super and hypermarkets that cater to almost all our daily needs. Having zeroed-in on the type of business let us look at aspects other than already discussed, like the preference of the country, class, etc.

In the present economic conditions, the class most suitable as a target group is the middle tier of the society. Even in an affluent country, the middle class forms the backbone of the economy. Mostly unwavering in their preferences, food habits, budgeting, etc. and not given into abrupt life-style changes, they are by and large dependable. Predictable in spending habits is another virtue. Savings is seen being commonly practiced. It has a sharp sense looking for ways to increase savings. It goes without saying that return on investment is high on their list of priorities. All this go a long way in helping the proposed project that targets this group to become successful.

Another aspect that makes it an attractive investment option is the flexibility it offers. Not being a high-tech business, without need for specialized training of workers and investment in expensive plant and machinery, it offers flexibility in terms of maneuverability.

Since all purchases will be made on spot payment basis, cost of funds applied on credit-based purchases can be saved that will enable a competitive pricing policy. Further, profit not being the prime concern, lower profit margin on the already lower costing will attract the non-shareholding customers too.

The three aspects, namely target segment, field of operation and type of business, form the foundation on which the venture is to be built up.  The Islamic character of the enterprise that will change the business outlook through the shareholding pattern, management structure and an informed consumer base portray the principles of equality and freedom.

Modeled on Musharakah:

To be specific, the system is to be made Islamic, styled on musharakah. A thumbnail structure will be drawn here. It needs ownership transformed as the ‘All shareholders actively participating outfit’. Unlike other line of businesses, retail food outlets play a unique role. Majority of consumer base is built upon regulars. Being a daily need, food finds itself in the first place in a household budget with a narrow plus minus variation enabling almost predictable off-take estimation. All this help in forming a sound business model.

Shareholding:

 

Shareholding pattern will be different from the corporate model. Consumer base forms the majority shareholders. Thus, true to the adage, consumer becomes the king. Without him there is no business possible. We have to give him his due:

  • A situation none better than having a consumer as the shareholder.
  • Each share to contain all forms of investment in assets to ensure neither borrowing nor credit deals.
  • Primarily Return on Investment (ROI) to be based on shareholder’s consumption.

Consumer investment interest having been taken care of, another important constituent is the worker. The employer-employee divide, the founding disparity of capitalism must be addressed here. Though neither a part of musharakah nor appearing to be practiced earlier, worker participation in shareholding, as a sound economic principle can be traced back in the Prophet’s (SAWS) life. His life exemplifies the importance of inclusive circulation of wealth reaching the downtrodden of the society. The abundance of wealth that flowed into the coffers of Islam from war booties and Prophet’s own share of it was never held back. He used to distribute it to the poor among his followers in a bid to create a society stronger from the base. As a top-heavy structure cannot withstand its weight longer, a pyramidal economic model best suits a society in terms of strength and longevity.

Thus, participation of workers can be justified as part of the business model. However, many among them may not have the wherewithal to bring-in their share value. The consumers’ share price can be increased to include proportionate workers’ share also, in the case of those workers who are unable to muster the funds. This part of share capital may be considered a separate fund that will get repaid monthly from their consumption income and annually from the net profit. Once full value realized, the share will be considered as a regular one.

Here, the employee shareholding is not an option but an essential part of the business structure that empowers them to exercise their rights as owners like the others. Strengthening the economy through their participation will pave the way for equality. In a true sense, it embodies the economic growth that Islam plans for the mankind, irrespective of their creed and cultural affiliation.

Shareholding will be allowed to all irrespective of their faith. However, keeping in mind their nature of belief not conforming to Islam, they will not be entitled to use the voting rights to form a bloc to take over or administer the affairs that deviate from the laid down policies.  Holding a senior position in administration on an individual basis may be allowed subject to these conditions.

The employment policy also should reflect the idea of betterment of the society than focus on individuals. Like consumer shareholders, one member of a family employed represents the household. The intent is that the benefits should cover as many families of the area as possible. In the case of female employees, the eligibility criteria will be that they should be the lone earning-member of the family.

In the case of expatriates who form a sizable portion of the middle tier segment in some middle-eastern countries, they are to be made eligible to hold shares like any other. However, in the ownership of undivided share of land and buildings, the law of the land shall prevail.

The investor capitalist is absent in this system. Consumers and workers being the only share holders and with drawing rights, the question of accumulation of wealth in the system also does not arise. However, a purely consumer and worker owned system may not work everywhere, at least initially.

The project will be implemented in three phases. The first is setting up the retail outlet. The second will be to have own source of supplies. The third is to set-up manufacturing units for products of varied necessities. As for the need to have stages two and three, it is also to insulate the whole venture from riba. The supply chain without the insulation will not serve the purpose of the venture itself as it get mixed with bank dealings and interest. Things will become clearer as you read on.

Phase – 1:

 

Islam’s answer to the economic woes of the down trodden and the working class who cannot easily find investment opportunities of choice bear fruit in its policies of equality and freedom. As said earlier, sharia based economic system Musharakah (profit sharing and loss bearing) suits best to demonstrate this micro-economic model of Islam. An alternative to riba, it has all the ingredients to represent an Islamic business venture. Incorporating the basics of Sharia, it must also be compatible with the present economic conditions so that it doesn’t fall short on any front.

Capital:

In continuation of shareholding discussed above, capital comes first on the list. Value of one share unit consists of average value of fixed and current assets and the proportionate value of workers’ share contribution. Working capital divided by the number of shares will be treated as each shareholder’s drawing rights (DR) in the form of monthly purchases. Eg: if each DR amount works out to USD 1,000/- per month, the consumer will be eligible to make purchases up to this level and enjoy a certain percentage of discount on it. In case the ceiling is reached within the monthly period, the consumer may replenish the drawing rights any number of times by depositing money in the working capital fund and continue to enjoy the benefit of discount based on his further purchases. Similarly some one who does not reach the DR level in a particular month, his discount will be limited to his purchases during that period. The balance DR at the end of the month will be carried forward and the short fall only is to be replenished.

As for shareholding, an individual or a family may also become a shareholder. However, more than one member of a family becoming shareholder is not beneficial and not encouraged.

The system ensures consumer loyalty. Better utilization of DR within the monthly period will fetch better returns. Thus the ROI is consumption based. The door for riba to creep in is shut firmly as each share value fluctuates based on consumption until it is replenished.

As for the non-member consumers, they pay for the purchases upfront and not being shareholders they do not enjoy discounts. However, they will enjoy the lower cost that will not contain profit taking by middlemen and ‘no interest’ element. Procurement being direct, there is no role for middlemen.  Interest cost in the case of bank borrowings also will not affect these enterprises using own funds to finance working capital requirements. Lower profit margin will be another attraction to them.

To look beyond banking:

To look beyond banking, another important issue to be covered is the operations necessitating deposit of monthly inward payments into the bank account to effect transfer of funds for purchases, etc. As long as own source of supplies are not established, it is difficult to escape the banking route. Yet another problem is the residual cash balance remaining as all the money deposited may not be used for future purchases. In an Islamic country, all this could be overcome by establishing a central agency taking care of the transactions. Without banking business of lending activity, it cannot be called a bank. It can neither be called a central bank also as it will not function as the monetary authority nor can it be the controller of the banking system. The purpose of riba not entering the transactions is thus served. In affluent economies, the residual balance can also be utilized on a collective basis to finance the poorer members of other economies under interest free terms.

The central agency may also be entrusted with transfer of shares from one unit in a particular location to another to allow the shareholding household ease of access. It may also act as a funding authority once accumulated profits of a unit or several units are to be channeled to set up a common venture that would supply the essentials or goods manufactured by them.

For those who operate under a different law, the only option to safe guard their residual balance from falling into riba is to set-up own source of supplies. As for the residual balance, part-take in the interest free lending networks operated by dedicated Muslim groups who ensure proper conduct of the system so that the micro-businesses who survive on borrowed money are saved from the lending agencies.

The organic line:

Coming back to the operational end of the venture, the choice of food as the proposed line of business, four things figure as the guiding principles: hunger, quality, affordability and choice.

  • Hunger: The simple definition of poverty bears this unmistakable mark. Today, majority of the world population suffers from lack of proper food. Alleviation of hunger is also a priority. (The physical phenomenon, the hunger, is not considered here).
  • Quality: An important part of food. It should have nutritional value, easy availability, social acceptance, hygiene and permissibility.
  • Affordability: It should be within reach of the target group in terms of pricing. Choice: Though social acceptability may cover some aspects, choice plays an important role when it comes to preference except in a state of hunger.

To lay emphasis on quality, purity assumes greater significance in the present context. While preservation is important to maintain quality, its basic character of freshness and appearance are indispensable. Another factor is the hidden substance, used as a preservative, is not visible to the naked eye. It has grown into dangerous proportions. The use of chemical fertilizers and pesticides in raw fruits and vegetables and in the form of preservatives in packaged foods is growing alarmingly. Though awareness is not at the required levels, on the part of the retailer it is incumbent on him to educate the unsuspecting customers and offer alternative safer options so that the true sense of the word quality is maintained. To a Muslim, it is not just a gesture of goodness on his part but more importantly following the direction laid down in the scripture that states Twayyiban.

This need leads us to deal in food naturally produced without any harmful ingredients used. This emphasis on purity is to be used to educate the consumer. The longer lasting damaging effects of chemicals are to be avoided. Normally we see the retailers stock what sells. Profit being the motive, the reasoning behind this practice is: “we sell what the consumer demands.” Instead, well being of the population should also be considered so that they can be educated about foods that contain harmful substances. The process is to be initiated from the beginning so that awareness brings about the change in food preferences.

Once into the organic food line, ensuring reliable source of supplies is important. Though the awareness created among people is showing a positive trend towards organic food, supplies are not as easy to come by. Coupled with prohibitive costs consumer is forced back into the harmful options. Considering the importance of providing pure food the venture has to look for avenues to procure it.  Alternative option will be discussed in detail in phase 2 of this project.

Management:

Since this is not a promoter led venture, management will either be entrusted with an experienced team among the shareholders or a professional one hired to head the business. Depending on the market and its demand, modalities may be worked out. However, representation by the shareholders on the board is essential.

Financial management would be vested with a central authority with a team consisting of a government representative(s), accounting and financial experts, etc., who will function under the laid down rules framed by the government in the case of an Islamic country. Since the venture is expected to be a large network of retail outlets, they will deposit the daily sales proceeds and the monthly replenishment of shareholder drawing rights with this authority. It will in turn make payments on behalf of the retail units. The centralized authority will also ensure that people do not fall prey to unscrupulous elements of the society, as any kind of venture without its approval cannot be set-up. However, in the case of countries where such an authority cannot be established, people have to be vigilant to safeguard their hard earned money.

Phase – II:

Here, we get into the agricultural field that would primarily ensure regular supplies to the retail chain. There is a more important purpose on going into the agri-business. The aim to reach the poorer sections of the society engaged in agricultural activity will be fulfilled by becoming their partners.

Suffering under the feudal system or debt ridden, small farmers are always at the mercy of money lending institutions or feudal barons. The most common sight now is their exodus from villages looking for greener pastures in mega cities. Mostly ending-up in the ghettos of the cities eking out a living doing menial jobs and living in shanties that can hardly be called houses, their miseries are subject for photographs or opportunistic elements to cash-in.

This is the picture that is seen in most of the low-income economies. No one to provide succor, the youth veer towards lawlessness. Their rehabilitation is a big question that the society cannot find answers easily. Not being part of the economic agenda, a fruitful step to be taken is to arrest the exodus. To do that, they must be given an alternative other than the measly livelihood or threat of prosecution resulting from unpaid debt. Those who own small portions of land may be brought in as investing shareholders and the others to find employment in them enjoying a worker’s shareholding like the organization of the retail chain.

With this two-pronged strategy we step into stage II. Bringing agriculturists and farm labor under the umbrella of the project to encourage them to get into organic farming. They are not targeted merely as a source of supply. They too come into the new venture as shareholders. The agriculturists will be brought in as shareholders in the new venture (hence forth to be known as venture 2) by contributing their land they own as share-value with working capital being provided by venture 1 (as it will be known). In turn the produce will be supplied to venture 1 on a cost plus basis. The agriculturists being shareholders themselves, the entire deal will be transparent negating the possibility of any short shrift. Scientific method of farming and better yield will ensure that farmers get a better deal than they have ever had. Losses due to force majeure will be borne by both on a pro-rata basis. (Accumulated profits of venture 1 and balance if any by venture 2).

Farm laborers’ shareholding as a bloc in the new set-up will be financed by venture 1. Similar to workers’ share bloc in the hypermarket, this new entity will have three groups holding shares; venture 1, the agriculturist(s) and the labor.

While this arrangement will ease the sourcing problems, it will also open venues for social uplift of the agriculturists and laborers ensuring justice and development. This will also create a new consumer base for the company as a second rung retail chain can be established that will function as an independent unit catering to the needs of low-income groups comprising farmers and labor of venture 2 in addition to local population of the area. Such units can be established in these villages and small towns.

The retail outlets of venture 2 will be independent entities that come under venture 1. Share capital will come from the members of venture 2, stake holders of venture 1 and at a later date from shareholding base of venture 3. It will be utilized to create assets, workers’ share bloc and working capital.

In the case of agricultural production, it may pose problems if venture 1 is established in a country that is not an agrarian friendly one. This may necessitate setting up the venture in a country suitable to the needs. Again the priorities will be the same as discussed earlier, finding an Islamic majority country where its values are encouraged. Though the logistics may differ, an import dependent country for agricultural needs is not a rarity.

Phase – III:

 

Larger in scope, the list of goods that is to be produced under this phase is quite long. Setting up manufacturing units to produce everything from a needle to the natural alternative to beauty products could prove to be an unenviable task. Goods produced with organic ingredients will be prioritized.  Shareholding pattern will be different from venture 1 and 2. Since direct consumer base is absent here, and investing shareholders are not to be encouraged, they hold shares jointly providing capital and workers’ shares. Workers join as shareholders as the process of venture 1 and 2 have set. Other operational details may be worked-out based on the product profile.

Like venture 1, both 2 and 3 will function under the control and guidance of the central authority. The units, if located in foreign lands may have to function under slightly different guidelines. However, care to be taken to have them established in Islamic countries or the majority ones so that they follow the Islamic law to the best of their ability.

The challenges:

The challenges from within could be quite dampening. The Muslim business community and those dependent on the system, are likely to resist the attempt to revert to the Islamic economic principle. They view it as regressive. Bred in capitalist system, the principles they maintain may be quite opposite to Islam. Similarly, governments in general favor the banking system for their usefulness in creating money when in need. Far from replacing it, a move to disturb it may be frowned upon.

Challenges apart, certain external factors may also affect the smooth functioning of the venture. These are mostly the regular features that affect the capitalist economies. Unless insulated in an Islamic economy, price stability may get affected due to external inflationary pressures. Higher dependence on external trade relations will negatively impact the spending capacity of the working class. An added cause may be the income of shareholding consumers. Increased outlay on necessities other than food also may become likely causes that could affect the spending pattern. Economic downturn due to volatility in political, social and economic conditions in the country it operates also may impact negatively. No economy is totally insulated from fluctuations that affect money value. Unless returned to the monetary system of money minted in precious metals, there appears no preventive mechanism that is effective enough. Contrary to this, Islamic economics should not, in principle, get affected as volatility is limited to conditions considered force majeure. However, operating in an alien environment, it cannot create boundaries that can’t be breached. Swimming against the global economic tide, all it can do is to create a protective layer of reserve funding. The ability to bear the pressure of cost fluctuations without being forced to pass it on to the consumer is part of a just dispensation.

Other factors that can pose challenge from within are brand loyalty and preference for unhealthy food choices.  In spite of efforts to create awareness, sticking to such habits could lead to situation where the venture either compromise with its laid down principles by stocking such items or part ways with its proponents. Insistence on particular brands being made available irrespective of health consequences also is similar in outcome.

General:

This business model is suitable for high income and low population economies too. The oil rich Arabian Gulf countries with a sizable expatriate community with middle/upper-middle income groups, if allowed shareholding, along with the local population, would be an excellent mix to try this business model. With friendly laws already in force, these economies can become the launching pad without going through the tedious process of altering the laws.

If the resistant economies are left out from the list of possible participants of this system, Muslim majority economies in the Middle East, Far East, Asian and the Indian sub-continent can play a crucial role in promoting this venture. These economies are equipped to handle all three phases, with a healthy mid-income group, agricultural background and an experienced labor force. The low-income group subsisting on meager income levels would embrace the proposition as it endows equality and freedom from exploitation.

All that is required from those who will be involved is to be honest and sincere. While the opportunity is promising, they must realize that the enormous responsibility that is to be shouldered is not trivialized. It is an amanah (trust) that is to be discharged with justice. In the present state of affairs, it is no mean task.

The shareholding pattern needs careful planning, as the households will have different views on how the business should function. Since people of all faiths are expected to participate, implementing Islamic principles should not become a point of conflict. Formation of groups with ideas that go against the fundamentals cannot be allowed to emerge. Provisions are to be made in the articles to discourage such activities. Take-over bids also cannot be allowed as voting rights should not be an infringement upon ownership issues.

Vagaries of nature are beyond control. Nonetheless, it affects the best thought out plans. Insurance to cover such losses incurred is common. However, fund-inflow in this system finding its way into activities based on interest makes it prohibited. An alternative system that legitimizes its practice is takaful. Pooling of resources by a group to safeguard the investment of its members in the event of a loss. It is a permissible practice.

It is not incumbent upon people to practice Musharakah or any of the other business system recommended as long as an individual is able to raise capital without borrowings. He is free to be an entrepreneur. The proposed venture will not disadvantage small enterprises engaged in similar line of business.

Conclusion:

Wealth is a paradox that is much more of a reality to man than it really is. The luster of its value that is merely a result of demand is never realized. But then, they cannot entirely be blamed. It has become the axis on which the world revolves. It also is an indispensable factor of life that cannot be ignored totally. The situation today of fewer people holding most of the world wealth is the result of this craving.

Lasting solution as presented above reflect the spirit of sharing. It is not charity. Charity is limited to those who have no means to earn or as a temporary measure. Qur’an exhorts us to give charity, but first we have to be just in our dealings. Giving from ill-gotten wealth is not charity; it is mockery of Islam. Zakat is not to be treated as charity. It is the right of the under-privileged. Similarly sharing is to be looked at as a dignified way for the underprivileged to find their feet. Wealth gets automatically distributed once the right means are employed.

Socially, accumulation of wealth in fewer hands leads also to exclusion of the under privileged by the rich raising walls, both literally and figuratively, to keep them out. Islam propagates inclusivity. It is necessary that the mind-set changes, so that human beings are able to interact with each other, promote sharing and help the ones in need. The world is not perfect beyond a limit. In spite of all the efforts class distinction will remain, though at manageable levels. Human nature and circumstances force such situations that cannot be helped, but endured.

In fact sharing creates more value to wealth spread among many than when it is restricted to a few. With opportunity to participate in economic activities, the increased flow of income to participants will spur growth. Savings invested in materials of value becomes wealth. Prosperity spread across the population increases demand that pushes up the value of assets held. Value being the measure of wealth, its increase through the spread across economic spectrum will surpass the present value levels without letting the economy to become over-heated if planned judiciously.

However, everything boils down to the fact that how people, especially the Muslims react to changes. How determined they are to face the challenges. Everyone involved will have to work towards achieving the goal. Tastes and preferences may have to be set aside and adopt lifestyle changes to make it a success. Sharing and caring are to be prioritized. Initial lower returns from investments should not deter them. Instead it should encourage them to pursue the goal of self-determination that would benefit others too. To a Muslim, in a true sense, it should be a cause for joy that he is part of an endeavor that brings the spirit of equality.

The world is waking up to the hazards of going with the present system. While on the one hand the lure of wealth keeps most of them shackled to it, on the other the voice of sanity is getting louder; especially from those who sit on top of the pile and have a vantage view of the approaching end game.

The truth shall prevail, however late it may seem. It is for those who believe to step-in. The venture proposed is only a business model. It can be anything that fits into the scheme of Islam’s ideals.

*********************************************

References:

[1]  Wikipedia. Freedom – Concept in philosophy.

[2] Wikipedia. Empowerment. Providing increased autonomy.

[3] Wikipedia. Islamic banking and finance. Profit and loss sharing and its problems.

**********************************************