Posted by: imranadeel | March 5, 2009

Using Interest-based Indexes as Benchmarks for Islamic Financing

I am not sure about whether this practice is still there or not, but till about three years ago, Islamic Banks would finance something (in any mode) but benchmark it against KIBOR (in Pakistan, at least).  When we asked some Islamic Finance scholars about why they were benchmarking their rates with KIBOR, they responded that if a seller of a soft drink keeps the price of his tin can equal to those of beer, then that’s not wrong, and thus this practice was ok.

Now that I am more involved in corporate finance of my company, I am very confused about this issue: Financing businesses is not like a soft drink, which is more of  a luxury, or a feel good thing; it is like water.  It is very hard to survive without it, if not impossible.  Businesses (and we) need funding to grow, expand and enhance our capacity.  If there is no equity available, we have to turn towards financing.  Now, financing is like water, which is a necessity: We don’t have other halal options of financing.  Therefore, if a seller of water bottles ups his price to equate that of beer (which obviously is high, and calculated using Haram bases and practices) then isn’t it wrong?  Doesn’t it categorize automatically as exploitation, usury and coercion, just like conventional banking?

With such questionable practices in the Islamic finance industry these days, it is hard to even talk about going for Islamic mode of financing with my CEO, who would laugh at my face if I tell him to do so.

Can we persuade the Islamic banks to stop doing it this way?  Can the Shariah advisers stand up to instruct their institutions to abandon such practices?  OR can someone correct me if that is not the practice anymore?

Imran.

This point is also posted as a question on IBFNet at http://finance.groups.yahoo.com/group/ibfnet/.

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Responses

  1. Yes, islamic banks still benchmark profits with KIBOR.

    In my view the beer can example is weird. [wAllah Alam]


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