Several scholars today sense the danger that that method of calculating profit represents to the Islamic financial industry as a whole.
Islamic finance is a moral financial model based on divine principles, the most important of which is justice. There are many Quranic verses and Hadiths that deal with this, such as: “We sent aforetime our messengers with Clear Signs and sent down with them the Book and the Balance (of Right and Wrong), that men may stand forth in justice,” [Surat al Hadid; Verse 25]. There is also: “And the Firmament has He raised high, and He has set up the Balance (of Justice)” [Surat al Rahman; Verse 7]. God Almighty also said, “Allah commands justice,” [Surat al Nahl; Verse 90]. In a Hadith Qudsi the Prophet [pbuh] narrated the word of God, saying “My servants, I have forbidden injustice for myself and I have made injustice forbidden to you. Do not be unjust to one another.” Renowned Islamic scholar al-Izz Ibn Abdul-Salam said that Verse 25 of Surat al Hadid represents the essence of Islam.
It is therefore just that profits should not be inflated to the point that this would invalidate the satisfaction [of the customer]. This is the crux of the matter in Islam, and can be seen in the Quranic verse: “O ye who believe! Squander not your wealth among yourselves in vanity, except it be a trade by mutual consent” [Surat al Nisa; Verse 29] and this is regardless of whether the inflated profit [made by the seller] is known to the buyer such as in the event of purchasing from a monopoly, or whether this increase [on the original price] is not known to the buyer, if the seller conceals the original price of the product.
There are several Hadith that prohibit sellers making large profits on the original price of items or services. In the Sahih Muslim collection of Hadith, it was reported that the Prophet [pbuh] said, “No one hoards but the sinner.” Muslim scholars explained the term “hoard” in this instance to mean the hoarding of a commodity that people need in order to sell it later at a higher price. This is something that is forbidden in Islam as it restricts the necessities available to the public. In addition to this, Prophet Mohammed [pbuh] also said, “Any Muslim who transgresses against another Muslim and is unjust then he is the sinner.” In another Hadith, the Prophet [pbuh] is quoted as saying: “Injustice of a buyer is riba [usury].”
Religious scholars had different opinions with regards to the amount of profit that is permissible to make. Some of them define this precisely, while others judge this according to local customs [and other factors], which is more reasonable. Therefore Islamic finance should operate in a just manner with regards to profits, and avoid outrageous [profit] inflation, particularly with regards to long-term financing, where the rate of profit is calculated by looking at the total amount of money borrowed, and the duration that this money is borrowed for, without taking into account the amount [of this loan] that has already been repaid.
There can be no doubt that profits are inflated in the financial sector, however such dealings are considered illegal under western laws as western banks differentiate between interest and usury. However this is a distinction that is not acknowledged under the provision of Islamic Sharia law. While this does bring to light the extent of the injustice in how profits are calculated in general, what about Islamic Sharia law that is based upon divine justice?
Unfortunately the Islamic banking system which is supposed to be based on just and ethical principles that themselves are based on a divine system that prevents injustice, has transgressed even the limits of the savage capitalist banking system in terms of the profits that it makes on its operations. By doing so, this causes Islamic financial customers, who are acting with a religious and moral motive [in using Islamic financial institutes] to shoulder a heavy burden, as if they are paying a tax on their [religious] commitment. Although juristic schools have managed to put forward reasons for this, I do not believe that such justifications will last for a number of reasons, such as many [Islamic financial] clients recognize the danger that this method of calculating profit represents to the Islamic financial industry as a whole and so they are demanding justice in how such profits are calculated and for this process to conform to principles of Islamic Sharia that prohibit such profit inflation.
Many scholars today sense the danger that that method of calculating profit represents to the Islamic financial industry as a whole, and that as a result of this the Islamic banking industry appears to be a greedy financial industry that is taking advantage of people’s needs in an ugly way, contradicting the Islamic Sharia principles that call for the implementation of justice and the prevention of harm. It is an Islamic Sharia principle that one “should neither be harmed nor do harm [to others]” and that [mutual] satisfaction be the focus of business operations, and this is something that will not be achieved when customers are in dire need or ignorant of the manner in which profit is calculated.
The last reason [for this] and perhaps the most important rationale to putting an end to this phenomenon and restoring matters back to normal with regards to the way in which the profits of the Islamic financial industry are calculated is the intervention of regulatory bodies to provide mechanisms for calculating Islamic finance profits, lending rates, etc. This is something that I expect to happen, especially in Saudi Arabia where the mortgage law is expected to come into effect soon. This mortgage law will be consistent with the provision of Islamic Sharia law, and will deal with one of society’s most important needs, the provision of housing. Therefore I do not think that the Saudi Arabian Monetary Agency [SAMA] will pass this [inflated] method of calculating profits onto the banking sector without first imposing certain restrictions and specifications, because this lies at the heart of its regulatory operations.
Source; aibim.com