May 31, 2017

The Interest Free Banking

The Interest Free Banking

English Essay on "The Interest Free Banking"

A bank, primarily, deals in money. It accepts money from the public and loans it to the persons who need money to carry out their business or need to meet their urgent demands. The money that a bank gets is the surplus money that goes towards capital formation. Traders, businessmen, producers and entrepreneurs borrow from bank to direct the money to productive channel.
One is reluctant to part with one’s savings unless one is compensated for one’s sacrifice. For this, the depositor demands some extra money from the bank. To meet this demand and also the cost of the services rendered to the borrowers the bank takes back a small portion of the profits from the borrowers along with the principals. This extra money is called interest.
A bank pays its depositors at a fixed rate of interest and charges the borrowers at a specified rate. But Islam disapprobates the interest because there is uncertainty in a business. It may be a success or may fail. It may not earn profit so much as to pay the interest. To a poor man who lives from hand to mouth the mere repayment of the borrowed money that he borrows to meet some urgent need such as marrying his daughter or repairing his old house etc., is an up hill task. The payment of interest would ruin him financially. On these grounds Islam banned interest or Rabuah and declared it Haram or impious.
The interest system has brought with it is disadvantages. Expansion of capitalist society, monopoly in the markets, accumulation of wealth in the hands of a few, and flourishing of the privileged class came with the interest system. Poor and people of scanty means cannot even think of borrowing money at the rate of interest charged by banks for the unproductive loans they need to meet their urgent consumptive demands.
It is pity that our intelligent ulamas or Muslim experts in financial matters have failed so far to devise a satisfactory method to do away with the undesirable interest. Some think the interest free banking is not feasible. Some advance proposals that sound beautiful in theory but fail when put to practice. No Muslim country has so far been able to do away with it.
The government of Pakistan have taken many steps toward Islamisation of the banking system. They have introduced profit and loss sharing accounts and have introduced measures to do away with the element of interest on loans. But ulamas are not satisfied with the steps taken by the government. They argue that the sources of profit paid on deposits are un Islamic. The sources of the income of the banks include discounting bills and selling arid buying forward exchange. The rates for these transactions are fixed taking into consideration the element of the loss of interest. They say that rates of foreign exchange for various transactions are also fixed taking into consideration the element of loss of interest. They further say that the authorities have only charged the name of interest and call it service charges which arc changed at fixed rate. Due to these defects the new banking system is not approved by them. But none of the critics has come out with a practical solution.

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