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The East African : Dec 15th 2014
The EastAfrican 46 Unde≥standing Islamic view of money, p≥ofit and banking A s Islamic banking continues to gather traction in East Africa, questions have been raised on what Islamic views are about money. The understanding of this is- sue is likely to determine how fast Islamic banking will grow towards promoting financial inclusion. Just how does Islamic bank- ing jell with financial inclusion and the flow of money in the economy? The factors of production un- der the Islamic economic framework are capital, land and labour. Capital includes all that is employed in the production process. It may also include all the means of production that cannot be directly used in production until they are consumed or altered in form during the course of production. Under the Islamic economic system, money is viewed as “potential” capital and can only be translated into actual capital when it gets combined with other resources to be used in production. Applying the concept, profit is viewed as compensation of capital under the Islamic system only if the same capital bears responsibility or liability. This means profit on any capital is realised as the residual revenue of a business that employed the said capital once payments to other entities or parties in the business have been made. In the event that the residual value is negative, the capital provider bears the loss, provided that there is no negligence or theft by the entrepreneur. Land employed in the produc- tion process, on the other hand, enjoys returns that may accrue in form of rent while labour that comes in the form of physical or mental deployment earns wages as compensation. Earning “money from money” is not acceptable in Islam. Money is only seen as a medium of exchange and the expression of value of an item and thus lacks value in itself. Potential capital Muslim jurists do however consider money as potential capital until it is invested in business. This is the wisdom behind considering money as a debt to a business when it is advanced to the business as a loan and it gets no return in the form of interest. Interestingly, money has no time value in the Islamic economic system unless it ceases to be potential capital and gets utilised in productive activities. Capital is an entrepreneurial capacity that facilitates the economy and fuels the transformative process of value creation. It therefore follows that mon- ey, or financial capital, allows entrepreneurs to translate an idea into action and create the infrastructure to sustain a business. Shariah-compliant banking is structured on the Shariah principles that prohibit the provision of interest on transactions. Unlike conventional banking, which values money as a commodity, the Shariah-compliant banks design their financial products and solutions to create trading and business arrange- A customer fills out forms at the Shariah-compliant First Community Bank. Islamic banking continues to gather traction in East Africa. Picture: File COMMENTARY JAAFAR SHEIKH ABDULKADIR “Money allows entrepreneurs to translate an idea into action and create infrastructure to sustain a business.” ments that pay profits to investors from real business activities backed by tangible assets with the provisions of sharing risk and rewards. The fundamental difference between conventional and Shariah-compliant banking is the prohibition of riba or interest, a term that literally means “excess” and defined as “any unjustifiable increase of capital, be it in loans or sales.” The interest-based financial structure is blamed for creating irredeemable debts, thus creating a class of people who get richer at the expense of the majority who get poorer and oppressed. A good example of this sce- nario is in the developing countries, which are caught up in a complex debt trap because of repaying yesterday’s debts with today’s fresh borrowing — a striking feature of an interest-based model. James Roberston, in his latest work, Transforming Economic Life, explains how the interestbased financial structures work in favour of the rich, and the role the present monetary system plays. According to him, the “perva- sive role of interest in the economic system results in the systematic transfer of money from those who have less to those who have more.” We also need to appreciate the fact that an interest-based system contributes to unemployment, because capital and wealth often flow in the direction of high and risk-free returns with no regard for the efficiency of the borrowing entities. Apart from the prohibition of interest, the Shariah-compliant financial system operates on other principles, which include risk sharing, asset-based transactions, prohibition of speculative practices, respect for the sanctity of contracts and the preservation of property rights and investment. The Shariah-compliant finan- cial infrastructure is meant to create incentives that promote efficient allocation of financial and other resources to fuel economic growth, reduce poverty and create employment. Jaafar Sheikh Abdulkadir is the head of Islamic banking at KCB Bank Group. See related story on Page 61 BUSINESS DECEMBER 13-19,2014 Maste≥Ca≥d set to expand footp≥int in Tanzanian ma≥ket By HELLEN NACHILONGO Special Correspondent TANZANIA’S NATIONAL Microfinance Bank (NMB) will roll out 1.5 million MasterCard payment cards, a programme that is expected to help reduce dependency on cash and increase financial inclusion. NMB chief executive officer Mark Weissing said the bank will issue EMVChip and PinMasterCard prepaid, debit and credit cards in the country over the next seven years. The cards will feature MasterCard’s contactless technology, which allows consumers to make fast, secure and more convenient payments. “We have combined MasterCard’s global payment technology with NMB’s dominant network of 170 branches, over 70,000 eMoney cashpoints and the largest ATM network to give consumers more convenient, secure and reliable ways to pay,” said Daniel Monehin, MasterCard Division president for sub-Saharan Africa. NMB cardholders will be able to use their MasterCard payment cards to withdraw money from ATMs that accept MasterCard globally. They can also pay for goods and services at retailers, fuel stations, restaurants and online shops. Progressive approach According to a recent MasterCard study, A Progressive Approach to Financial Inclusion, 37.8 per cent of Tanzanians own a payment product, with the number of excluded citizens having been halved since 2009. “The country has in the recent past made excellent progress in extending financial inclusion and financial services to the underserved, through the government’s supportive and regulatory policies and partnerships like this, which help the country reach its 50 per cent target by 2016 as set by the National Financial Inclusion Framework,” he said. Financial inclusion “By working together with the government, financial institutions, merchants and businesses, we will be able to help modernise the payment industry in Tanzania, reduce cash usage, deepen financial inclusion and enable more consumers to participate in the global economy,” he added. NMB says it will also introduce the World Rewards card, a premium MasterCard product, to its affluent customers, many of whom are frequent travellers. World Rewards cardholders will be able to earn loyalty points on their card spending, which can be redeemed for flights, car rentals and hotel stays.
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