Thread by @SafdarAlam

THREAD
Today, I want to talk about the claim made by every Islamic bank in the world - that they engage in genuine trading of assets.

Let’s talk about the difference between genuine trading and artificial trading, and examine this claim.

What is the claim? Islamic banks make the claim that they do genuine trade in certain assets – whether it is commodity, cars, homes, anything.

Why is this claim important? This claim is absolutely crucial - it is the cornerstone to justify that their trading,

even though it may be priced at Riba (and it is always priced at Riba/interest), is genuine trade and thus permissible.

That benchmarking to Riba is not important, and is, in fact, permissible (this is another claim that is false).

As Muslims, we know that trading is permitted, yet Riba is forbidden. This is used to justify that the trading that Islamic banks do is permissible, even though (in every single instance) we find that Riba (interest), somehow, enters into this trading activity..

As an example, we will look at the activity of a trader (who buys and sells equities, for example) and compare it to how an Islamic bank “trades”.
Then, next, we will look at a fruit stall trader.

Equities Trader –
1) Buys an asset he thinks will appreciate in value – otherwise no point in buying the asset – banks buy it and they do not care at all what the price is expected to do.
2) Holds the asset for some time to enable the market value to change,

it could be intra day, or even. Islamic banks sell assets immediately after buying them.

3) Accepts risk price can fall – and if it falls he is not obliged to sell, but can hold on in case it rises later, or it can fall even further, the trader has to make a choice here.

Islamic banks never face the risk of the price falling.

4) Always has an inventory, no profit can be made if he does not trade – Islamic banks only purchase an asset once they receive a promise from a customer to buy it from them

5) Does not allow deferred payment - he is not geared to take credit risk, he understands the equity risk only. Islamic banks must allow deferred payment, because that is the only reason the customer will pay a higher price than the market price.

6) He will never buy something with a view to selling it immediately for no profit ( due to transaction costs and time). Bank MUST sell it immediately.

7) He will never buy something and sells it immediately pre-agreed to make a loss (not rational).

For Tawarruq, the bank demands that customers must sell it at a loss.

We can also compare with what a broker does – but a broker makes revenue via the spread and is providing a service. Nobody will buy from a broker who asks for more money than market price.

Broker makes profit from spread, not from price manipulation.

Banks are not brokers -

they are selling something that is available on the open market. They only buy it to sell it at a higher price immediately.

We can argue that not all traders are equity traders, so ....

Now let us look at a trader who buys and sell fruits

1) Here, he is not hoping for a rise in price to make profit (because fruit has a shelf life) but relies on the fact that he can sell fruit for a higher price than he buys it. But he has no guarantee that anyone will buy it at a higher price. Islamic banks have this guarantee

guarantee / promise already in place.

2) He must have inventory to make a profit, we will buy fruit on a daily basis, and must either sell it or face retaining stock that will be worth less tomorrow, so he will reduce his price to sell it, transform asset to capital to buy more

fruit for tomorrow.
Islamic banks never face this risk. They sell to customer or if he fails to uphold his promise, the bank returns to seller or sells on the open market and customer is liable for all losses.

3) He will alter what he buys based on what people buy. Banks only buy once a customer has committed to buying it from the bank.

4) He must change his price sometimes, in order to meet changes in supply and demand, and also to sell his stock on the day. The bank pre-agrees the sale price and will not change it at all.

The stark differences between genuine trading and what Islamic banks do exist in every single area of trading. Shop owners, retailers, real traders, real markets never, ever operate the same way as Islamic banks approach their “trading”.

What Islamic banks do
1) Only buy an asset with a promise to buy already - no asset price risk at all.
2) Do not maintain an inventory with full risk of failure to sell the asset
3) Promise to buy is at a profit for the bank based on time and deferred period

4) The onward sale price is always priced at LIBOR (sale price = cost price plus profit where profit = cost plus (LIBOR rate) times cost times period of deferment (years), or more accurately:

5) Never face the risk of price of the asset falling

6) If this is Tawarruq, rely on buyer to sell immediately at a loss, to a party arranged by the bank (against AAOIFI)

7) The price is irrelevant of the asset, it’s a function of cost and time, so can be the same for apples,

cars, houses, tables chairs etc.

8) Bank always sells immediately, via a pre-agreed promise. This promise agrees a sale price calculated with reference to LIBOR (this is against AAOIFI Shariah rules).

One final point – I heard on the radio today an advert for John Lewis (a department store in the UK) is offering interest-free plans for some items. Is this any different to Islamic banks selling items and allowing the customer to pay in the future? Yes, it is - let me explain

JL is a retail company, they actually sell goods to customers. They offer their goods for immediate payment. If they do not sell these goods, they have stock they cannot sell and that is a problem for them.
They overcome this problem by marketing, great service, and

good pricing.

One other way is to offer low interest (or interest free) payment plans. However, that is to complement their main business, which is selling goods.

The offer to pay later may incentivise some customers to buy goods.

Islamic banks do not do this – they do not offer the goods for immediate sale, and then also offer instalment plans to incentivise buyers. They ONLY offer them on instalments, because they have no interest in selling them for immediate payment at all.

They MUST have the customer paying in the future, because they are giving finance. And finance is always repaid in the future. Who on earth heard of finance that is repayable on the same day that it is given?

This is why JL can offer this as part of their trading and sales business, yet when Islamic banks offer this, it is only a consequence of their explicit business of offering financing and charging interest.

FYI, a classic argument used to justify the price charged by Islamic banks goes like this – if you open a shop and sell halal juice for a price, and the shop next door sells alcohol at the same price, this does not matter.

One is halal, and the other is haram, it is just the price that is the same. This is used to justify the use of LIBOR as a benchmark and thus the calculation of the sale price.

This justification is wholly false and flawed, and it preys on people’s ignorance of money and the financial markets.

I will expose this fallacy in another thread soon. If you still believe in it after that, then I guess you believe in the following too!

Why do Islamic banks not do genuine trade? Well, they actually do do some genuine trade – they are in the business of trading money. They obtain it by paying interest on deposits, and they sell it by creating debt and charging interest.

The use of assets for trading to justify this is artificial and this claim is disingenuous.

What should Islamic banks do? Well, they should be honest. Either they trade money, which they do, and they are transparent about it (they are not). Or they trade goods, in a genuine

manner. At the moment, they do neither.

Alternatively, we must work to find a better way, that does not trade money at interest but instead utilises real capital for real purposes, and avoids financing and debt altogether. I am working on this.

END THREAD