Can Banks Survive without Interest?
Before discussing the hypothesis that banks can survive without the institution of interest it is pertinent to mention that the Shariah does not prohibit all gains on
capital. It is only the increase stipulated or sought over the principal of a loan or debtthat is prohibited. Islamic principles simply require that performance of capital should also be considered while rewarding the capital. The prohibition of a risk free return and permission of trading, as enshrined in the Verse 2:275 of the Holy Quran, makesthe financial activities in an Islamic set-up real asset-backed with ability to cause ‘value addition’. The forms of businesses allowed by Islam at the time the Holy Quran was revealed included joint ventures based on sharing of risks & profits andprovision of services through trading, both cash and credit, and leasing activities. Allah the Almighty did not deny the apparent similarity between trade profit in credit
sale and Riba in loaning, but resolutely informed that Allah has permitted trade and prohibited Riba.
Besides trading, Islam allows leasing of assets and thus taking rentals againstthe usufruct taken by the lessee. The contracts of loans are different from the lease
contracts on the basis that ownership in leased assets remains with the lessor whoassumes risks and gets rewards of his ownership. In loans, on the other hand,ownership of loaned goods/assets is also transferred to the loanee/borrower who isobliged to repay its similar. All such things/assets corpus of which is not consumed with their use can be leased out against fixed rentals, while money cannot be leased
out.Profit has been recognized as ‘reward’ for (use of) capital and Islam permits gainful deployment of surplus resources for enhancement of their value. However,
alongwith the entitlement of profit, the liability of risk of loss rests with the capitalitself. No other factor can be made to bear the burden of the risk of loss. Financialtransactions, in order to be permissible, should be associated with tangible real assets. At macro level, this feature of Islamicfinance can be helpful in creating betterdiscipline in conduct of fiscal and monetary policies. Savers who have been avoiding the banking channel so far due to involvement of Riba would approach Islamic Banks only when they are assured that their funds would be invested in Shariah compliant activities. Therefore, credibility of Islamic
banks is crucial and the key to success and development of this emerging discipline. Users of bank funds take the benefit of having access to the savings of millions of middle class depositors and as such they should give to the savers the due share in profit that they earn from the business activities. The most important pre-requisite in this regard is mass awareness about the concept of Islamic banking among the general public and the education of bankers and the business community.
Islamic banks, while functioning on a basis other than interest, have to perform a crucial task of resource mobilization, their efficient allocation on the basis
of both PLS (Musharaka and Mudaraba) and non-PLS (trading & leasing) based categories of modes and strengthening the payments systems to contribut
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