To make any conventional financial product Shariah- compliant it is necessary to observe three conditions:
Firstly: the instrument used to make the product Shariah-compliant is sound.
Secondly: the essence of the Shariah-compliant transaction is sound and different from that of the conventional product, which is the reason for its prohibition.
Thirdly: the use of the product is sound and has no negative implications.
These conditions are based upon that which makes the transaction permissible in Islam in reality; that its form, essence, and the outcome are in harmony with Shariah rulings and objectives. The soundness of the kind of a transaction alone is not sufficient, as its nature is more important and takes priority. Besides, it should not have adverse, harmful outcomes. A transaction could be sound in terms of its form and essence yet it leads to specific harms. For example, the sale of weapons may be a real and sound sale contract fulfilling the first two conditions, but if sold knowingly to criminals then it becomes impermissible.
Cash Financing and Shariah Compliance
In cash financing, the bank provides cash to its customers unattached to a particular commodity or service. The bank gives the customers cash and they spend it as they wish.
Conventional banks provide cash financing through interest-bearing loans, but Islamic banks cannot do the same as this constitutes Riba. However, since the provision of loans, i.e., cash financing, is an essential service in the banking system and a source of profit, some Islamic banks have attempted to Islamise cash financing contracts.
Thus, the question arises: how is it possible to Islamise cash provision to customers with profit without falling into riba?
The answer to this question could be “yes” if the Islamic Shariah accepts reaching the reality of a loan with increase by means other than a riba-based loan,i.e., by using other contracts, such as a sale contract to reach the same end, namely giving cash to the customer that is repaid at a higher amount. So does the Shariah accept this?
That which Islam prohibits in riba is providing cash to a person for a higher amount, i.e.with an increase over the amount that was taken. This is the essence of what Islam prohibits, and what the term Riba suggests. Allah did not forbid riba in all His revealed religions for the sake of its outer form or the way it was achieved. Instead, He prohibited it because of its essence and reality as an exchange of money for more money deferred. Just as alcohol was not prohibited because of its color, flavor, smell or name, but because of its essence as an intoxicant that causes numerous harms, Islam similarly prohibits Riba due to its nature of giving money for more money, because here is where the evil resides.
The prohibition of riba in Islam is not limited to a particular contractual form but applies to any contract that leads to the same result. If giving money for an increased amount by a means other than a loan was permitted, the Shariah would not then prohibit ‘īna sale, or joining a sale contract and a loan (salaf); besides, the Jews would not have been condemned by Allah for consuming riba, as they used to consume riba through ‘īna and other similar contracts to avoid the riba-based loan contract, as the Quran exegetists state. The prohibition of riba would have no meaning if the riba contract could be re-formulated as a sale, such as ‘īna in order to achieve the same outcome.
Despite this, unfortunately, some Islamic financial institutions have structured commercial cash financing products. It is possible to say that by providing this financing these institutions have taken a path that is completely void of logic and is comical.
To explain further, a brief analysis of one of these products is provided in the following discussion.
Tawarruq Cash Financing
This formula is considered the most popular method of cash financing today. It comprises of the financing bank using any commodity to justify providing cash to the client and requesting a higher amount in return at a later stage. This is done through tawarruq whereby the bank sells a commodity to the client on a deferred payment basis, paid in installments, and then manages its sale on behalf of the client for a cash amount that it pays him immediately or places in his account.
Although Fiqh jurists from the different Fiqh schools have issued verdicts (fatwa) that justify tawarruq for a person who is in need, this is not at all about banking tawarruq that some Islamic financial institutions perform.
Firstly, the verdicts are for those who are in need of financing – the individual (mutawarriq) – and not for those who prey on the needs of people through aid. Secondly, it refers to a person who intends to buy a commodity from the market and then sells it to someone else without collusion between the parties.
This stands in contrast to banking application where the banks seek people to perform tawarruq through them. It is no secret that a single transaction could be permissible for one party and impermissible for the other. Someone in desperate need is not sinful for taking an interest-based loan, but the sin remains upon the lender. The same applies to the banking tawarruq. The client who is in need may be exonerated from sin, however, what absolved the sin upon the financial institution that seeks to profiteer from people’s needs? All of the fatwa that we find in the Fiqh permitting tawarruq to apply to those who are in need, and not for those who prey on the needs of people using legal-tricks (tahayul), as we see in banking today. If this tawarruq was permissible as some argue, what is the value or benefit of prohibiting riba? What objective would the prohibition of riba achieve in that case?! Conventional banks could easily Islamise all of their products if tawarruq was permissible! There would be no need for Islamic financial institutions, and no need for all of the other contracts, such as Murabaha, istisna, salam, musaharaka, and so on.
In sum, tawarruq and similar contracts that achieve profits from cash financing contradict the Shariah objectives behind the prohibition of riba. The prohibition of riba becomes then void of any wisdom or benefit!