The Holy Quran ordains that: "O ye who believe! Fear God, and give up what remains of your demand for usury, if you are indeed believers." (Al Baqarah: 278). Allah then reminds those who continue to practice usury of the dire consequence of such practice by saying: "If ye do it not, take notice of war from God and His Apostle: but if ye turn back, you shall have your capital sums, Deal not unjustly, and ye shall not be dealt with unjustly." (Al Baqarah: 279).

It was narrated that the coming of the verses relates to two particular companions of the Prophet, namely, Abbas Bin Abdul Mutalib and Othman Bin Affan who were involved in the practice of usury then. They used to lend dates to other people until the next harvesting season. As the harvest for that particular season was not as good as expected, the borrowers were unable to pay back the borrowed dates in full. As a solution, both the lenders and borrowers came to an agreement whereby the borrowers pay half of the borrowed dates and pay the other half in the next harvesting season plus a similar amount in extra (an additional 100 percent). The Prophet came to know about this practice and ordered both companions to stop it. Then came the verses. They obeyed the prohibition.

Taking the above as the basis of his argument, Dr Muhammad Anwar (an Economics Professor at the International Islamic University) in his article entitled Islamicity of Banking and Modes of Islamic Banking (Publisher: International Islamic University) pointed out that many doubts still linger pertaining to the practice of Islamic banking, thus raising the question: "Is Islamic banking practice really in line with the rules as ordained in the Quran? His research and analysis reveals that " functions of both central banks and commercial banking systems are contrary to the teachings of the Quran." {op. cit. p. 1).

Although there were opinions that "conventional interest rate is nothing but mudharabah " (op. cit. p. 2-3) and that the Grand Mufti of the Al-Azhar University was reported to have declared that "the interest-based banking is akin to mudharabah and murabahah " (op. cit. p. 3), the majority of Islamic scholars agreed that conventional interest rates are indeed usury and hence, unlawful.

According to Muhammad Anwar, the use of Islamic terminologies by Islamic banks "is merely a change in form rather than substance of banking business." (op. cit. p. 3). The practice of Islamic banking, except for the usury part, does not differ significantly from conventional banking practice.

Entrepreneurial bank

Consequently, we cannot say with confidence that the practice of Islamic banking is totally free of usury elements. He revealed that murabahah (including bai bithaman ajil ) is the most widely used mode of financing. For example, 91.6% of facilities extended by Bank Islam Malaysia Bhd to its customers is in the form of murabahah and bai bithaman ajil financing. Musyarakah financing accounted for only 0.5% of total financing extended, mudharabah (0.5%) and ijarah (2.6%). Hence, Islamic banking operation is no different from conventional banking practice, that is, both receive deposits and give out loans. A true Islamic bank should, in the main, be an entrepreneurial bank rather than a lender. Hence, measures need to be implemented to transform Islamic banking from "the traditional lenders to the Islamic entrepreneurs." If steps are not taken in this direction doubts will remain on the Islamicity of Islamic banking and Muslims especially will not be able to erase any confusion that they have in their mind on the practice of Islamic banking.

In order to understand why Islamic banking is still not fully Islamic, it is necessary that one must know what is usury.

When two homogenous commodities are exchanged at different prices, the difference in the prices is usury ( riba ), regardless of whether the exchange takes place on spot basis or deferred basis. For example, if A and B exchange RM1.00 on spot basis and A receives RM1.20 for the RM1.00 he gives to B and B agrees to such an arrangement, then that 0.20 sen is usury. If A lends RM1.00 to B for a year (deferred exchange) and asks B and B agrees, to pay back the loan for RM1.20, then that 0.20 sen is usury.

In a conventional banking practice, the additional 0.20 sen (because the loan is only paid back one year later) is known as a time value of money which is equivalent to "rental" for the use of the money for a particular period. Time value of money is interest rate and if Islamic banks apply the same principle in charging additional amount on loans extended to their clients, then the practice is similar to the conventional banking practice. This practice is therefore usurious. If banks only retrieve the principal amount from their clients, then it is not usurious. But if banks retrieve the principal amount plus a measure of time value of money, then such a practice is prohibited. This is precisely the meaning of the verses quoted above. According to Muhammad Anwar "an analysis of the contemporary Islamic banking practices shows that time value of money is part and parcel of all financing transactions." (op. cit. p. 8).

Generating returns

Banks must generate returns. How? Conventional banks collect deposits from depositors at a particular rate of interest and lend the same to borrowers at a higher rate of interest. The difference is known as interest rate spread or lending margin. Currently, Islamic banks also do the same. They are not directly involved in trading and production activities since they are not entrepreneurs. Islamic banks, akin to their conventional counterparts, also lend money to third parties - clients (including entrepreneurs) at a spread.

Islamic banks also must generate returns. They cannot add time value of money to the loans they extend to their clients. How then? "One way is to pose as traders by engaging in a fictitious purchase, adding profit component to the purchase price to arrive at a selling price of the purchased item to the customer at deferred price. So treat the selling price as a credit (loan) due." (op. cit. p. 9). The difference between purchase price and selling price called profit is indeed the time value of money.

It is found that this practice has become the basis of Islamic banking practice regardless of whether the modes of financing are bai al dayn (sale of commodities or services at deferred prices), murabahah (mark-up sale and the amount is paid back in lump sum), bai bithaman ajil (mark-up sale and the amount is paid back in installments), ijarah (leasing) or bai inah . The only glaring difference is that in the case of conventional banks, the purchase price becomes the principal of the loans (for example, the original purchase price of a house) whereas in the case of Islamic banks, the selling price (purchase price plus a mark-up) is the principal of the loans. The end results are starkly similar. And both conventional and Islamic banks use the same formulas and annuity tables in calculating the monthly installments of the loans. Muhammad Anwar then concludes that: "In this way it is clear that the profit added to the principal is nothing but riba." (op. cit. p. 9).

In Malaysia, bai al dayn refers to sale and purchase of debts without involving commodity transactions. This is prohibited because there is an authentic hadith which prohibits the practice of kali bil kali (sale of debt). However, bai al dayn which refers to transactions in which commodities or services are transacted at deferred prices are allowed.

The practice of bai inah is prohibited. It refers to a transaction in which a bank buys an item from its client at a lower spot price and then sells the same item to the same client at a higher deferred price. The reverse may also be done. A bank sells an item to its client at a higher deferred price and then buys back the same item from the same client at a lower spot price. There is an authentic hadith which prohibits this practice. It was reported that Umm Muhibbah sold an item at a deferred price of 800 dirhams to Zaid Bin Arqam and she bought it back from Zaid at the spot price of 600 dirhams. Aishah came to know about this and she prohibited it. Although this transaction apparently involved the exchange of money and commodity (and basically should be allowable) but it is prohibited because "these two exchanges boil down to a single gainful exchange of money with money. Commodity may be brought into the picture to put a trading label on a lending transaction that yields riba." (op. cit. p. 11).

Concerted efforts

There were also confusions on qardhul hassan financing. In the Quran (it was mentioned six times), it refers to deeds of spending one's belongings in the cause of Allah because every time it is cited in the Quran, it is in the form of a command "to lend qardhul hassan to Allah." Hence qardhul hassan is a form of sadaqah . Paying an extra amount voluntarily on a borrowed sum, that is, the principal plus a hiba falls under the concept of hassan al- ada (better repayment) and is encouraged by the Prophet who had himself set the precedent by paying more than the borrowed sum.

However, under the Islamic banking practice today, the voluntary extra payments have been so institutionalised that they have assumed the status of riba. For example, Islamic banks regularly pay returns on current and savings deposits. Similarly, the Malaysian government regularly pays returns to holders of government investment securities issued on the basis of qardhul hassan . Hence. Islamic banking has assumed the practice of riba in the name of regular voluntary payments by the borrowers to the lenders.

In order to ensure that the Islamic banking system operates according to the tenets of Islam, steps must be taken to transform Islamic banks "from mere financial intermediaries to entrepreneurs." (op. cit. p. 22). It means that Islamic banks must involve directly in trades and industries as opposed to the current practice of channeling deposits to third parties and transferring risks almost entirely to them. Islamic banks must mobilise deposits by way of mudharabah and musyarakah arrangements and the depositors are given shares in the profit generated, if any. At the central banking level, steps must be taken to change the current monetary system of "fiat money standard" to "commodity money standard" (for example, gold dinar). The current Islamic banking practice remains shallow.

It is hoped that "Muslim scholars will sooner or later realise the truth and make concerted efforts to replace the present banking system with another system that would reflect a faithful observance of the command of Allah and His Messenger (PBUH)." (op. cit. p. 24).

Dr Rosli Yaakop holds a PhD in Economics from the University of Wisconsin, USA. He is an economic columnist with Harakah and currently Negeri Sembilan PAS Commissioner