THREAD
The Myth of Profit Sharing in Islamic Banking
One of the main features of Islamic banking that makes it so different is that of profit sharing. Rather than a bank just giving a loan at interest, it “invests” into the business and it takes risk in the outcome, and it
The Myth of Profit Sharing in Islamic Banking
One of the main features of Islamic banking that makes it so different is that of profit sharing. Rather than a bank just giving a loan at interest, it “invests” into the business and it takes risk in the outcome, and it
and it shares in the profits.
Well, this is absolute nonsense.
In theory, this may sound fine, but in practice, it never happens. Ever.
Let me explain why.
Profit Sharing Example
Here, a bank, or investor, will inject capital into a business and agree a profit sharing ratio
Well, this is absolute nonsense.
In theory, this may sound fine, but in practice, it never happens. Ever.
Let me explain why.
Profit Sharing Example
Here, a bank, or investor, will inject capital into a business and agree a profit sharing ratio
So if the bank invests £1mn, and they agree that the bank will keep 40% of all profits made by that business, then this is clear. If the business earns £100k in one year, the bank keeps £40k, and this continues.
This sounds great – the bank is really acting like an investor, or joint partner in the enterprise. If the business does well, the bank earns more, if the business struggles, then the bank earns less return. In fact, if the business loses money, the bank should be prepared
to lose its capital.
Contrast this to debt – where the bank gives the same £1m, but this time as a loan. They agree an interest rate of 5% p.a., so the business must pay £50k per year – regardless if the business is doing great, ok, or badly. This is impermissible,
Contrast this to debt – where the bank gives the same £1m, but this time as a loan. They agree an interest rate of 5% p.a., so the business must pay £50k per year – regardless if the business is doing great, ok, or badly. This is impermissible,
this is Riba (interest).
OK, so now let’s look at what Islamic banks do.
For example, Islamic bank A, they do not state the contract that is used, but they make this point clear:
OK, so now let’s look at what Islamic banks do.
For example, Islamic bank A, they do not state the contract that is used, but they make this point clear:
Have you ever heard of a of share where the investor demands repayment in equal monthly instalments? Or does that sound more like a loan to you?
Another Islamic bank:
Another Islamic bank:
(FYI Salam Finance is another mode of providing debt, priced at LIBOR) – their business financing makes the business buy an asset they do not want, and have to repay the bank a pre-agreed rate of profit (charged at LIBOR)
Maybank Islamic:
They make it very clear that this is “financing” (no profit sharing here), and that they use Commodity Murabaha (another financing product, charged at LIBOR).
They make it very clear that this is “financing” (no profit sharing here), and that they use Commodity Murabaha (another financing product, charged at LIBOR).
Meezan Bank (Pakistan) offers the following products:
An excellent range of loans, I am sure you would agree. However, these are all deb, and charge LIBOR.
No sign of profit sharing here.
An excellent range of loans, I am sure you would agree. However, these are all deb, and charge LIBOR.
No sign of profit sharing here.
There are many different contracts used by Islamic banks when they give finance to businesses, but NONE of them are profit sharing. They deliver debt, and they charge interest in the form of profit (Murabaha, Commodity Murabaha and Tawarruq), rental payments (ijara) and so on.
They simply never enter into any profit sharing with the business at all – EVER. This is not their business.
Their business is debt and interest.
However, there is not all bad news!
Islamic banks DO use some profit sharing products. But when WE give money to THEM.
Their business is debt and interest.
However, there is not all bad news!
Islamic banks DO use some profit sharing products. But when WE give money to THEM.
What they do is use our funds (as deposit holders) and invest them into Shariah compliant instruments.
What they mean, is they use these deposits to fund their lending activities, which charge interest. Now, Islamic banks will rarely tell you where your money
What they mean, is they use these deposits to fund their lending activities, which charge interest. Now, Islamic banks will rarely tell you where your money
is “invested” into – only once have I seen a Malaysian Islamic bank be transparent and state the funds went to finance some of their home finance products (charged at interest).
Otherwise, the banks like to act like they are using OUR money and investing in some heaven-sent,
Otherwise, the banks like to act like they are using OUR money and investing in some heaven-sent,
magnificent enterprises that benefit the community, and are aligned with Shariah values. But they use it to make loans, and charge interest - that is the simple honest truth of it.
So they DO share the “profits” made from these debts, they give us a profit share of that. But even, then, they will pay us a Mudarabaha profit amount REGARDLESS of what they use our money for. If the funds make more or less profit (interest) for the bank,
and whatever our profit share ratio is, we will receive whatever the “target” profit rate is.
So, profit sharing occurs only when it is OUR money and the bank directs our money to making loans at interest.
And our share of the profit is calculated at interest.
When the banks
So, profit sharing occurs only when it is OUR money and the bank directs our money to making loans at interest.
And our share of the profit is calculated at interest.
When the banks
use THEIR money, they never give profit sharing financing to anyone. They rely on the contractual certainty of debt, and it is always priced at interest / LIBOR.
I wish this myth of profit sharing in Islamic banking dies.
Until we actually stand up to the challenge, and start to offer real (risk and) profit sharing, and actually are brave enough to act like our faith demands of us.
Until we actually stand up to the challenge, and start to offer real (risk and) profit sharing, and actually are brave enough to act like our faith demands of us.
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