Structure of Islamic Banking System: Islamic Economic System

Throughout history, there have always been those who engaged in usury-based quasi-banking activities with their capital, but Islam forbade it and encouraged them to engage in productive and business activities.

Accordingly, it can be assumed that although the banking system did not exist at the time of the advent of Islam, but the structure of the Islamic banking system or quasi-Islamic banking is based on redefining the relationship between capital and profit to remove usury from business relationships. Therefore, Islamic economics can easily provide a religious and lawful solution and activate banks as a stimulus to the economy. According to the principles of the Islamic banking system, loan transactions are allocated only to savings and current accounts and bank lending for a small part of consumer needs, and thus no interest is accrued on the accounts, and the bank is free to use such funds received.

But a very large part of interest-free banking operations is related to the transaction of funds in which the bank plays the role of intermediary and lawyer, and legally this amount does not belong to banks. As a result, the bank does not have complete freedom in using these funds, but must invest it in profitable economic projects or leave it to capital applicants based on some kind of participation in their profits and losses.
In this process, the interest earned or a part of the accrued interest after deducting the right of the bank’s attorney should be returned to the owners of the deposits and in transferring these funds to the applicants, the interest and benefit of the depositors should be considered.
In this type of banking, depositors, in addition to the fact that the amount of their interest is not known in advance, need information about the efficiency of various economic sectors in order to invest in those sectors, as well as information about the contract between the depositor and the bank and they need to be aware of the authority they give to the bank.
According to the Shahid Seyyed Muhammad Baqer as-Sadr, who wrote in his book “Bank without interest in Islam” (1960s), the usual banking method was usury and then is banned in Islam. He rejected the efforts of some jurists to justify bank profits based on the current economy and considered the capital of individuals in banks as a “loan” and considered any interest on it as usury. Instead, he has tried to illustrate the example of Islamic banking by presenting an executive plan that operates according to Islamic law. Thus, Shahid Sadr designed interest-free banking at two different levels:
1. Interest-free banking in the Islamic system
2. Interest-free banking in the non-Islamic system

Shahid Sadr seeks to establish a real bank with all the real components in the model of the day that operates within the framework of Islamic law, so he describes the characteristics of Islamic banking and the relationship between the bank and individuals as follows:
1. A bank is a wholly commercial institution that seeks profit.
2. The bank equips stagnant capital and leads it to productive economic activities.
3. The Bank, by financing agricultural, industrial and commercial enterprises, on the one hand provides employment for the unemployed and, on the other hand, contributes to economic growth and development.
4. The Bank helps to expand business activities and market development by expanding money exchanges through checks and current account services.
5. Legal relations between the bank and depositors on the one hand and between the bank and the recipients of facilities on the other hand, in usury banking is based on a loan agreement with interest, which in Islam is usury and forbidden, but in interest-free banking is based on contracts accepted in the view of Islam.
6. The usury-based bank regulates and defines its activities in the position of a capitalist (owner of capital), while the Islamic bank (Non-Usury Bank) operates as an agent and defines its income not on the basis of interest and profit, but on the basis of wages and attorney’s fees.
7. Usury banking with many years of experience, has gone through a lot of risks, but interest-free banking is at the beginning and in order to spread new banking system, it should be content with low profits for a while and be ready to accept all kinds of risks and should know that at this time, in addition to its commercial and business responsibilities, it also have the responsibility to save the Islamic Ummah from the system of usury and infidelity.

In order to realize this plan, Shahid Sadr proposes the Islamic banking model as follows:
A) Equipping monetary resources: through traditional methods in the form of current deposits (without interest), savings deposits (profit of participation in economic projects), long-term fixed deposit (with profit from the bank’s participation in profitable projects). In these methods, the relationship between individuals and the bank is based on “power of attorney”, according to which the bank is allowed by the depositor to invest in profitable economic projects and pay the profit of this partnership equally with the customer after deducting its fee.
B) Allocation of monetary resources: in the form of Murabaha and interest-free loans (for depositors or investors who are in trouble or financial crisis), cashing commercial documents (only by reducing the cost of discounting the nominal amount of the financial instrument), providing services Banking (receipt of checks, sale of financial instruments such as promissory notes and checks, sending bank transfers), receipt of promissory notes and bills, purchase and sale of securities, holding of valuables and securities, providing bank guarantees, buying and selling foreign currency and especially investing in Industrial, agricultural, manufacturing and other plans, are the methods that Shahid Sadr predicts for banks to earn money so that they do not resort to receiving and paying bank interest or usury for profit.
C) Transaction with usury-based banks: In Shia jurisprudence, there are exceptions to receiving usury, which are: usury between Father and Son and Husband and wife, as well as the Kafir who is not staying in an Islamic country. Therefore, Islamic banks can enter into transactions with companies and financial and banking institutions of non-Islamic countries (Dar al-Salam and Dar al-Harb) and receive interest from them while investing in these banks.
Therefore, in Islamic economics and banking, what happens is that the relations of individuals (natural and legal persons) change and lead to the formation of a legitimate and non-usury economic relationship, just as from the Islamic point of view, the relationship between a man and a woman changes from a forbidden to a lawful state (Haram to Halal) by changing the friendship relationship to marriage.

The article was written by Dr. Mohammad Saeid Taheri Moosavi and first published in Shafaqna.