This week alone, I came across a few articles and tutorial videos from prominent figures in our country. One side was arguing that the aqad of specific transactions practiced by most Islamic banks are prohibited or haram, while the other side is advocating the current practice of Islamic banking.
Unfortunately, none of the scholars ever mentioned the problem lies with the banking system itself. In one of the tutorial videos I have watched, this famous scholar explained how banks (including Islamic banks) function as financial intermediaries to fill the gap between what he called “surplus of units in the society” to the people who have “deficit units”.
The truth is, the banking system does NOT work in such a manner, regardless of whether it’s conventional or Islamic. Banks do NOT only lend what they have in their deposits. Banks create credits. That’s what bank is. Banks can give out loans of RM 100 million even if they only have RM 5 million in deposit. Where does the RM 95 million come from? It comes out of thin air. It’s created by a system called fractional reserve banking. That’s how “currency” is created. Yes, banks can do that. We can’t. So how do we justify banking industry to continue making billions of profit from this evil system? I could resemble this situation as if a thief is trying to sell a stolen car, and we are busy identifying the most suitable “aqad” to selling the stolen car; ignoring the fact that the car is stolen. This is the part where I find most awkward. Are we so blind of this injustice? This is the topic where most scholars in Islamic banking try to avoid to discuss in public for some reasons I do not know.
Instead of focusing on the real issue, many of us are so busy arguing on the issue of aqad, contracts, and so forth, within the current framework of banking system. While I don’t have problems with that, I always try to avoid arguments in those areas. Why? Simply because it’s not the real issue. That’s why after more than 3 decades since Islamic Banking Act was introduced in 1983, where are we now? Contracts and agreements may sound more “Islamic” with many financial jargons quoted in Arabic, but is the essence so? I don’t think so, because fractional reserve banking system continues to result in inflation and ushering moral hazard to the nation.
In a nutshell, before we try to develop an alternative to the present banking system, we must first identify the primary issue; the creation of credit through fractional reserve banking. To top it all off, banks are charging interest from it. We know that Islamic banks don’t call it interest, they call it “profit”, but the creation of credit through fractional reserve banking has never been resolved; or at least being addressed as a challenge to be resolved.
Now, are we ready to look at the real problem?