When people hear the term โIslamic bankโ or โIslamic financial institutionโ, a lot of them tend to make a major assumption that the organisation in question should be a charitable, not for profit entity or that its charges should be very minimal and token in nature. In reality, this assumption is far from reality and it is important to understand the following point: Islamic financial institutions (IFIs) have been established by shareholders, who expect that the management team (CEO etc.) running the institution generate an acceptable level of profit for them on an annual basis. Failure to generate such a profit for the shareholders would possibly lead to the termination of the management team or in the worst case scenario, the closure of the institution.
Similar to any conventional financial institution, an IFIs needs to generate profit, which in simple terms, would be the difference between the income generated and the costs incurred by the institution. The major difference between the two types of institutions, is that the shareholders of an IFI want the management team to operate the institution in a manner which does not conflict with the Shariah. This means that any profit can only be achieved by investing in income generating activities and for charging for services that are considered to be Shariah compliant. Hence, like conventional financial institutions, the majority of IFIs have been established as profit seeking entities. This is a crucial point to understand.
After understanding the above point, the question that arises and that one may ask, is that if this is the case, i.e. that IFIs are mainly profit seeking entities, what about those individuals within the community who need access to money and cannot afford the fees/profit charged or who are not deemed creditworthy by IFIs? The answer to this question, in my humble opinion, is as follows:
Firstly, IFIs tend to have subsidiaries or CSR departments which are responsible for distributing Zakah, giving interest-free loans, Sadaqah etc. Individuals who are in need of such funds may approach these subsidiaries or departments in order for their individual case to be looked at. However, there is definitely room for expansion in this regard.
Secondly, we must realise that IFIs in their current form, have not been established to solve all the socio-economic issues of Muslim communities. Stakeholders within communities, need to come together themselves to form socio-economic institutions for the benefit of their community and cannot rely solely on IFIs or Islamic banks for this purpose.
Thirdly, the act and spirit of charitable lending on an individual basis needs to be revived within our communities. This encouraged act, should not be underestimated and is an essential ingredient within any society. The revival and establishment of Waqf (Awqaf) is also key.
