The most significant feature of a truly Islamic economic system should be that it ought to be fair. Interest has been condemned by the Qur'an because it jeopardises that ideal. The practice of demanding security from borrowers while lending is also viewed by many Muslim scholars as unacceptable. However, even if modern banks are somehow able to get rid of these important -- though not vital -- tools of operation, banking would still survive and yet remain almost as unjust as ever before because, as we shall see, unfair lending is in-built in the nature of its operations.
The following is one of the most unequivocal, though honest, statements on the lending policy of banks:
...it would be irrational for lenders to be willing to lend as much to the impecunious as to the rich members of society, or to lend the same amounts on the same terms to each. (Mishan, E. 1972)
Such an apparently unethical policy statement has not necessarily been initiated by an unscrupulous mind. It has been prompted by the fact that banks, like other business enterprises, are more concerned with their commercial interests and they lay no claim to be regarded as substitutes 'for charity houses' (Ahmad S.M. 1989, 141). An important reason why banks are mostly prepared to lend to the already prosperous business concerns is that they believe that it is not their function as lending institutions to find capital for the customer's business; they believe that the major stake should be that of the proprietor himself (Mather 1979, 21). Therefore, it is no exaggeration that it 'seems to be easier to borrow $5 million from a bank than $50,000' (Clarke 1980, 46)
Aleem, in his attempt to study the rural credit markets in Pakistan, reports the following:
The chances of getting a loan in [the findings of] our study were directly related to the amount of land owned... Thus a farmer owning more than 100 acres was virtually certain of getting a loan if he wanted one. At the other end of the scale the chances of a farmer owning less than 12.5 acres ever being able to get a bank loan was less than 50%. (Landless tenant farmers were not eligible for institutional loans at all). (Aleem 1985, 224)
The criticism on the banking practice that the banks are hesitant to extend loans to applicants who are unable to present collateral security is often dismissed by a claim that banks do sometimes lend even without requiring security. However, even when that is done banks make sure that they are charging more interest for the higher risk they are taking up. The general banking principle is:
Where the safety of any advance is unquestioned because the borrower and/or the security is undoubted, the rate of interest will often be somewhat lower than that charged for accepting a higher risk or perhaps for advancing for a less acceptable purpose. (Mather 1979, 18)
This, in other words, means that the more wealthy people are required to pay lower rate of interest and the less-privileged have to -- because they are not wealthy -- pay more for borrowing from the banks!
The bankers, moreover, do not make any secret of the principle that even if, on occasions, a wealthy customer requires loan for a purpose deemed unsuitable by them, it is better to avoid disturbing the valuable connection 'or incurring the wrath of a wealthy if turbulent customer, whose security margin commands respect' (ibid, 23)
As a natural consequence of the policy of favour for the rich, the less rich and the poor are ignored and avoided. The same institutions which offer millions of dollars to the rich are, as a matter of strategy, extremely weary of those less wealthy salaried officers with slender resources, for example, who are short at the end of each month and who, therefore, may start relying upon the bank regularly to make up the deficiencies if no objections are raised to their excess drawings in the previous months (ibid, 33). Ironically, however, it is these small depositors, at least in case of commercial banks, whose 'slender resources' together accumulate in the bank vaults to make the huge pool of funds that are later diverted towards the rich.
We now turn to a question which is crucial to the future of banking in the Islamic societies: If relative richness is not an acceptable criterion for the disbursement of bank funds, what else is? Most Muslim economists and bankers devoted to the cause of interest-free banking are quite convinced that the most predominant, if not the only, principle banks should follow while lending should be the possibility of efficient employment of funds (Ahmad, Z. 1991, 46 ) i.e. banks , at the time of lending, instead of looking at the wealth and security of the applicant, should consider 'the profit potential of the concern' (ibid)
Despite the fact that the efficiency criterion seems to be much more rational, two questions still remain to be answered before it is approved as Islamically acceptable as well: Is it possible to apply that criterion objectively and, even if that is possible, is that principle fair from the point of view of Islamic teachings?
As regards the first question, it could be claimed that it is not impossible to devise fairly accurate project evaluation techniques based on the information supplied by the applicants for funds to find out which of the projects deserve to be helped by the limited funds available with the banks. In fact many modern financial institutions do already undergo some form of objective project evaluation process before finally responding to the applications.
The vital question is whether the most objective of those criteria could be fair as well from the Islamic point of view. We have to get clear answers to three important questions before the efficiency criterion is considered Islamically acceptable:
Banks are able to pool huge funds as a result of the fact that people have an inclination to deposit their funds with them for various reasons. It is quite certain that the depositors are not directly involved in deciding the avenues their own funds should flow into. The decision is left in the hands of the bankers. Had the funds belonged to the bankers or had the depositors been involved in deciding the fate of their funds, few objections could be raised.
The reality is that the huge banking resources, the way they are, seem to bear some similarity to the natural resources like water, fire and grass which belong to the entire community rather than any particular individual. The Prophet (sws) is reported to have said: 'All Muslims are partners in grass, water, and fire' (See Ahmad Z., 55). He is reported to have decided the disputes of water distribution on the basis of proximity of land to the source of water (See Khan, M.A. 1989, 59-61) i.e. the one whose land was the nearest to it was given the right to use it first and then the second nearest and so on.
Indeed water is needed for crops like funds for business projects. In fact, water has never been an abundant resource in the significantly parched soil of Arabia. But the Prophet (sws) did not distribute this scarce resource on the basis of efficiency or the area of landholdings of the farmers. If the analogy of the bank funds with natural resources is to any degree reasonable, neither the principle of credit-worthiness nor efficiency would appear acceptable to Islam.
The other analogy suggested to decide the status of bank funds is that they are like Fay' i.e. wealth attained by Muslims without effort. If the analogy is correct -- and indeed it seems to be highly relevant -- then bank funds should be distributed to the poor and the needy rather than the wealthy or the efficient because neither of these groups is mentioned by Qur'an as deserving any share in the wealth of Fay (See 59:7)
If the principle of efficiency is to be implemented strictly as the sole criterion for distributing funds, it would promote the most efficient economic agents in the society; they will get abundantly rich while all others would lag behind. To halt that tendency then would be as difficult as it is now to narrow the rich-poor gap when the more privileged receive the lion's share of the finances. It appears to be equally unfair. A few more attempts to analogise financial funds with some other facilities would facilitate the understanding of the point I am attempting to make. If the availability of extra funds is equated with the availability of educational opportunities, the case for efficiency criteria appears weak insofar as the weaker students may arguably deserve more attention than those who are better. If the good students continue to receive better education that would certainly widen the literacy gap, as would the decision to fund the more efficient economic agents increase the income disparity. In case of higher education, however, better students deserve and do normally get more attention. But can the availability of funds be reasonably equated with higher education?
If a justifiable comparison can be made between bank finances to borrowers and training to workers in plants, then, in the latter case, quite clearly the less capable appear to deserve more attention. Likewise, they have to learn significantly more to be able to achieve the minimum level of skills to work effectively. If we compare financial assistance with medical assistance then, again, the less efficient borrowers deserve more assistance just as the less healthy and the sick have a stronger claim on the medical facilities.
No matter how much we may stretch our imagination in the pursuit of discovering a comparable case in the real life examples to justify the efficiency criterion of distributing bank funds, it appears, we will always encounter difficulties in our attempts.
Even if, by some inconceivable way, it is established that efficiency criterion is a fair principle of distributing bank funds, there would still remain the unsolved problem of distributing funds strictly in accordance with that principle. Justice demands that if efficiency is a fair principle of distributing bank funds, the most efficient borrowers should get as much more funds as they are efficient and the slightly less efficient should also receive funds commensurate with their ability and so on. However, this principle would never be able to be applied because of the enormous complications involved in the whole operation of finding the respective levels of abilities of the applicants and distributing funds accordingly. The reason for such apprehension is that the funds available to financial institutions are always limited and it is not humanly possible, nor commercially viable, to divide the available funds into the number of applicants, with each getting according to ability.
To conclude, it appears that the criterion of efficient employment of funds proposed by some Muslim economists to be used for distribution of bank funds cannot be accepted as fair.
It may well be asked that if neither the credit-worthiness criterion nor the efficiency one is relevant in the context of Islamic teaching, what else is? The answer to that question is that criteria for distribution of society's funds are needed in economies where huge funds are allowed to accumulate unnecessarily, as is done in modern societies by courtesy of banks. In a society, where the savings of the people are arranged to be related to the productive enterprise directly, no criterion will be needed to guide the economy; the savers will decide for themselves where to invest on the basis of not just the efficiency criterion, but also such factors as personal contacts with entrepreneurs, their reputation and popularity, the nature of business enterprise, its contribution to the ideals of the society etc. In other words, the task of deciding how resources should be allocated ought to be fulfilled by the market and not, as Robinson pointed out, 'by the great corporations who are in charge of the finance for development' (Robinson 1977, 1337) in the existing set up.