The following is the text of an email exchange that took place during the period September 2007 - March 2008 between an executive officer and Shari`ah advisor of an Islamic commercial bank and Tarek El Diwany regarding the fiqh position on bank current accounts, reproduced with the kind permission of those involved. The names of the bank and its employees have been changed to maintain confidentiality.
TED: Assalamu `Alaikum [Executive].
A bank run in the UK? But they told me it would never happen!
Can you just confirm for my record, that [Islamic bank name withheld] wouldn't be troubled by a bank run. Being Islamic, if your bank represents to one of your customers that he or she has x pounds available for immediate withdrawal in a current account, then your bank does actually have that money, doesn't it? Hope all is well, insha'Allah.
[Executive]: Wassalam Tarek.
We do have the money of our depositors but we do not keep it all in cash form - we do invest the money to generate profit to our Mudaraba accounts holders. We do keep a certain amount of cash on hand to meet customers' demand - our cash flow management plan allows us to meet all our on demand deposits in a 8 day period. This is cash that we have to keep ready to meet the demand. Now a bank run in this country might affect us due to the fact that other banks might not be able to honour their commitments. However, we only deal with high credit-rated banks in the region and the largest Islamic banks outside the region.
TED: Wa `Alaikumussalam [Executive].
Thank you so much for your reply. From your comments I conclude that [Islamic bank name withheld] promises to pay its current account depositors on demand but would be unable to fulfil that promise if all (or many) of those depositors required it to do so on the same day. I understand that this is the case because [Islamic bank name withheld] does not keep all of the current account funds in cash. You will be aware that Northern Rock made a similar promise to its current account depositors, and kept a similar fraction of their money in cash form, hence the bank's inability to cope under this same scenario. May I therefore ask whether [Islamic bank name withheld]'s Shari`ah Board has approved the practice of making promises that cannot be fulfilled under certain circumstances? Would it not be better to tell your current account depositors that they may only be able to withdraw their money after eight days, and that this act would itself be dependent on the performance of third parties? Looking forward to hearing your thoughts on this, insha'Allah.
[Executive]: ASA Dear Tarek,
Sorry for the delay - I have been out of the office much in recent weeks. I have copied in our Sharia`a Compliance Officer - who could probably offer you speedier replies in future. All the promises are made in good faith and under assumptions that the business would run as usual. There would hardly be any promise which would stand the test of other things not remaining the same. For example any business has both receivables and payables on the balance sheet. The business promises to pay the creditors based on the assumptions that the debtors would pay. What would happen if the debtors do not pay or the business is liquidated? Even the accounts/ financial statements are prepared under the going concern principle/assumption. As of today there has not been a single instance in which we have not been able to pay our depositors on demand. We keep sufficient liquid assets for this purpose and a substantial portion of our assets are in short term investments. In order to facilitate large cash withdrawals we already ask customers to give us 24-48 hours notice due to security risk management at branches (we minimise the amount of cash in our branches due to risk of raids, theft, fraud etc). Thus accessing money there and then has always been subject to practical limits. Our Sharia`a board is aware of the way we operate our current accounts on the principles of Qard Hassan and that the activities we undertake are allowable and in accordance with their guidance.
TED: Thank you for investing time in providing me with this reply, although I do not think that your balance sheet analogy fully addresses the issue at hand. See http://www.islamic-finance.com/item147_f.htm for a detailed explanation of the point I am making. One further legal point arises from your reply. If your current account is operating on the basis of qard, then presumably when a current account holder at your bank pays for goods by cheque he or she is in effect paying for those goods with a debt (owed by [Islamic bank name withheld]). In many cases this produces a transaction that traditional scholars have prohibited (for example, a double deferment of countervalues in a contract of exchange). On the other hand, if the current accounts are working on the basis of the contract of deposit, then a different set of legal issues comes into play. One of these relates to the use of deposits by the bank (for financing purposes perhaps) when they are meant to be available for immediate withdrawal by depositors. It has been argued that the bank guarantees its depositors and is therefore allowed to use the deposited funds as if they were a loan, but no commercial bank in the UK has sufficient reserves to make good on even a few per cent of its current account deposits and such guarantees are therefore meaningless. I don't want to trouble you with a continuation of our exchange of views, although of course I'd be very interested to hear your further comments. Permission to quote some or all of your replies in a future article would also be much appreciated.
[Scholar]: Salam Tarek,
Eid Mubarak to you and your family. I am sorry for the delay in answering your question but I was off and have just come back to a huge backlog of emails and other things to do. Anyway, I read your email but I could not understand how paying with a cheque will become "a double deferment of counter value" (I presume that you are referring deferring of payment and delivery of goods at the same time - if not please explain more). We consider that all customers will be using their cards and cheques in a halal way and for halal goods and services. This is part of our T&C. Usually customers pay for the goods/services for immediate delivery although sometimes the delivery may be delayed, but the payment using a debit card or cheque is considered to be a spot and not a deferred payment. The use of a cheque is considered to be a spot payment like paying for the goods in cash. As such there is no deferred payment here - the selling contract between the seller and the customer is on spot basis and not on deferred payment - although the cheque will take three days to clear but this is something acceptable by Sharia`a and the seller otherwise he would have asked for cash. Please review the ruling of the Islamic Fiqh Council on the types of acceptable constructive receipts /payments of funds - ruling No: 53 (4/6) in Jeddah 1990 where they considered that cheque payments and banks ledgers are acceptable types of spot payments. I hope this will answer your question. Best Regards.
TED: Thank you very much for your response.
To clarify, if the bank-client relationship is one in which the client has loaned funds to the bank, then for the client to pay for goods with a cheque drawn on the bank is equivalent to paying for goods with a debt. This action on its own is widely prohibited in a variety of situations, for example it would constitute double deferment in a contract of bay` al-salam. You point out that some scholars have accepted a clearing delay of a few days in this matter. That is reasonable of course, although an earlier email from [executive] indicates that [Islamic bank name withheld] may take up to eight days to retrieve invested funds, and even then this is dependent upon the performance of the third parties to whom the bank has previously provided those funds. There may therefore be a further issue of gharar to deal with here. This is especially so, given the relatively small amount of capital that the bank has available to make good on its guarantee to redeem the amounts that it owes to its current account clients at any one time. On the other hand, if the bank-client relationship is seen as one of deposit, then a cheque may constitute an instruction that effects a change in ownership of readily available money by means of a book entry at the bank. Payments made with a cheque would not then be seen as payment with a debt, and the legal issues surrounding such payments would not then arise. However, a different problem would arise in this case, which is that the bank invests deposited funds whilst simultaneously representing to current account clients that those funds are available for immediate withdrawal. This is a misrepresentation on the bank's part, and that is putting it mildly. My comments on the nature of the bank-client relationship are of relatively minor importance and were only made in response to [Executive]'s earlier email. Therefore it is perhaps best to ignore them until you have addressed the core criticisms of commercial banking practice ("Islamic" or otherwise) that I have set out in the article at http://www.islamic-finance.com/item147_f.htm. I'm genuinely interested to know whether you see any weaknesses in those arguments. If you do, could you let me know what they are? Looking forward to hearing your further comments when time allows, insha'Allah.
[Scholar]: Salam Tarek,
There are few issues I need to clarify with you especially about your understanding of what a deposit means in Islamic terms? And why are you distinguishing between a current account based on qard and one based on deposit?
TED: It seems that I have assumed your familiarity with these issues. Please forgive me. Here is a basic description of the problem as I see it.
Let us assume that the bank's current account is a loan contract under Shari`ah, and that I have loaned the bank £100 in order to open such an account. Now imagine that I buy something for £100 from a third party who is also a current account holder at the bank. I write a cheque in the amount of £100 and give it to the third party. The third party pays the cheque into his current account. The cheque instructs the bank to transfer to the third party the debt that it presently owes to me. By transferring ownership of this debt to the third party, the bank has not placed "money" in the ownership of the third party. The bank is merely saying that it now owes £100 to the third party, instead of owing it to me. So in this example, payment for my purchase has been made with a debt, not with money. This presents a number of problems under Shari`ah. For example, it is widely prohibited for a debt to be used when paying the capital in a salam contract, or when contributing the investment capital in a mudarabah, or when paying the countervalue in a contract of bay al-sarf. Furthermore, if I receive any benefit in return for giving the bank the loan of £100 (for instance, if I receive free banking services) then this will be seen by many jurists as a form of riba.
On the other hand, if we regard the contract between the bank and myself as one of deposit, then the substance of the contract is that the bank is being entrusted to hold my money in a place of safekeeping. Because the bank represents that my money is available for immediate withdrawal whenever I desire, it should not use my money for other purposes during the period of the deposit. For example, it should not invest my money without seeking my permission. To do such a thing would be a betrayal of the trust that forms the basis of the deposit contract. But so long as the current account operates as a genuine deposit of trust then, when I pay for something by cheque, that cheque acts as an instruction requesting that the bank transfers the money held in my name to the name of the third party. In this case, payment is made by transferring money, not by transferring debt. In other words, when this transaction is complete, the bank does not owe the third party £100 but instead holds £100 of cash in safekeeping on the third party's behalf. There is a big difference between owing someone £100 and holding £100 in safekeeping for him, as I am sure you would agree.
Now let us examine the case in which the bank uses the deposited funds with the depositor's permission. In such circumstances, the common Shari`ah view is that the deposit of trust transforms into a deposit of guarantee. In a deposit of guarantee, the bank guarantees to repay the amount of the deposit from its own reserves in the event that the money is not otherwise available when the depositor requests it. The deposit of guarantee is therefore seen as the legal equivalent of a loan that is repayable on demand. Two points arise under this treatment. First, no commercial bank has sufficient reserves to effectively guarantee the deposits of all of its current account holders, and the guarantee is therefore largely worthless in commercial terms. The Northern Rock episode is an example of what happens when current account customers call on a bank to honour such a guarantee. Second, if a deposit of guarantee is indeed to be regarded legally as a loan, then the rules of payment by debt which I discussed above should also apply to current accounts that operate on the basis of a deposit of guarantee.
The debate as to whether a current account is a loan or a deposit, in legal terms, has been going on for some three hundred years in England and has never been properly resolved. This has resulted in a fundamental ambiguity at the heart of commercial banking. For example, while the word "deposit" is frequently used in the marketing literature of a bank ("make a deposit", "open a deposit account", etc.), the language of debt is used when banks prepare their accounts (current account liabilities are listed under "short term debts", "short term creditors", or such like). Both types of language are critical to the business of commercial banking. The language of deposit allows a commercial bank to say to its "depositors" that their money is available for immediate withdrawal. The language of debt allows a bank to argue that it has borrowed the money that has been placed by customers in its current accounts, and that the bank is therefore the owner of such money. And if the bank owns the money, it has the right to lend it to others for a commercial gain. But of course it is impossible for money to be in two places at the same time. It cannot simultaneously be available for withdrawal by depositors and loaned out to the bank's borrowers. This is the element of gharar in commercial banking and it has been ignored by most Islamic banking scholars. The essence of the conventional commercial banking model is not riba, as these men would suggest. It is riba plus gharar. Until modern Muslim jurists recognise this, they will not fully understand the problem that they are facing, nor will they produce a viable alternative.
Once again, I ask you to regard the above discussion as a footnote to my main criticism of commercial banking at http://www.islamic-finance.com/item147_f.htm.
Insha'Allah, I have now done my best to present you with my knowledge in this area. I look forward to receiving a definitive reply when you are ready.
You build your understanding on the assumption that the process of money transfer from one account to another will be processed as per your description above. Our understanding of the process is different - when you make a payment out of your account this is considered to be a withdrawal - the minute the money goes out of your account we will deem this as an actual payment of your loan in cash. Now the third party may decide to deposit the cheque at our bank or at any other bank - if he deposits it at our bank this will be considered as new money received in accordance with our Consumer Banking Terms and Condition which state that "We will assume that any credit balance in your account belongs to you. By depositing money into the account you are deemed to confirm that no one else has a right to or an interest in the monies deposited ..."
Using a cheque as a method of payment is considered to be one of the approved methods of constructive receipts and as good as payment in cash - this also the understanding of the Fiqh Academy Council in Jeddah please review their resolution No 84 (or 1 /9) on the 9th meeting in Abu Dhabi 1995 - point A - where they accepted the payments of cheques to purchase gold (i.e. accepted it as equivalent of cash) you can also review the books of the majority of contemporary scholars on this issue including Sheikh Wahbah al-Zuhayli ("Contemporary Financial Transactions" page 42 (Arabic) - (Types of the constructive receipts (1- a cheque payment))
I agree with you that there is a difference between owning £100 and safekeeping it (I assume the Islamic word for safekeeping is Amanah) each has its own rules. However, using Qard for this type of transactions is not a problem as I explained above.
For the purpose of Islamic current account the Fiqh Academy Council has considered in their resolution No 86 (or 3 /9) on the 9th meeting in Abu Dhabi 1995 - the First Point: that all current accounts are considered to be a loan arrangement from Fiqh point of view.
As for the permission to use the money while they are at [Islamic bank name withheld]: we included this in our Consumer Banking Terms and Conditions which reads: "All amounts held in the accounts we maintain on behalf of our customers are held in strict conformity with the rules of Sharia`a as determined by our Sharia`a Supervisory Committee. Unlike conventional interest based bank accounts, we do not pay interest on the account nor do we use your money for prohibited interest based lending. We may however use the money in the account for Sharia`a compliant purposes".
Using customers` loans with their permission is acceptable - being a loan [Islamic bank name withheld] have (implied guarantee) to repay the loan on demand. If the deposit is not available on time, for any reason, the rules for loan will apply (i.e. the customer should give us more time) - I guess this is why our bank prefers the Qard over the Amanah. Again using the Qard base current account for payment has no problem from Sharia`a point view as explained above.
There is no question over the principle of which [Islamic bank name withheld] operate its current account - It is the Qard principle - this is very clear from Sharia`a point of view (at least) - Whether the legal debate in England goes either way, this should not affect our understanding.
We always try to explain everything to our customers regarding the current account and the principle of Qard. Therefore I don`t believe that there is any unacceptable Gharar in our practice. Of course no one can claim that there is no Gharar at all in any account we open or in any deal we do, but this type of Gharar, if existed, I believe to be minor Gharar which is insha`a Allah an acceptable one.
I hope this clarifies the issue for you regarding [Islamic bank name withheld]`s current account - If you need more information on any of the issues above please let me know.
Finally I would like to add that these are my own views and understanding of the issues discussed above and not those of [Islamic bank name withheld]`s Sharia`a Committee - As I have not discussed this email with them or asked for advice with this regards.
With regard to your request to publish this discussion I would prefer not to publish it just to give us the opportunity to discuss freely. However, if you believe that you need to publish the view of the industry on this issue please do so without making reference to the source as per the normal practice.
TED: Wa `Alaikumussalam Brother [Scholar].
Jazakallahkhair for answering my email in detail.
I do hope that you will in due course respond to my central criticism of the modern commercial banking system at www.islamic-finance.com/item147_f.htm. For the time being I see that you have focussed on the detailed legal issues, and this of course is the approach commonly adopted by scholars in our industry. It is indeed halal to open a door, to pick up a wallet, and to walk quietly. Yet this is exactly what a thief does when he steals. To look at the individual actions of a thief without considering the purpose behind them is not the correct approach to the subject. I ask you to consider why a commercial bank does what it does, and then give your answer. I say that a commercial bank is a fraudulent institution that creates money from nothing in order to lend it at usury, and I say that there can never be an Islamic version of such a business.
On the detailed legal points, I respond as follows:
>>You build your understanding on the assumption that the process of money transfer from one account to another will be processed as per your description above. Our understanding of the process is different - when you make a payment out of your account this is considered to be a withdrawal - the minute the money go out of your account we will deem this as an actual payment of your loan in cash.
The payment process I described in my previous email is a matter of fact, not a matter of understanding. You may consider a payment from an account to be a withdrawal of cash in the example that I gave, but in fact it is a book-keeping double entry made by the bank clerk. The commercial banking system can only operate if most of its transactions are NOT enacted as withdrawals of cash. When customers of Northern Rock wanted to withdraw cash, they found that the cash wasn't there. The bank's guarantee to pay cash is found to be worthless as soon as it is tested to any substantial extent. This is why Northern Rock had to approach the Bank of England for assistance (i.e. to borrow large amounts of cash). If our monetary framework contained only a "minor element of gharar" then the consequences of its failure would not be so enormous. Northern Rock required over twenty billion pounds worth of emergency funding to stay afloat.
>> Using customers` loans with their permission is acceptable - being a loan [Islamic bank name withheld] have (implied guarantee) to repay the loan on demand. If the deposit is not available on time, for any reason, the rules for loan will apply (i.e. the customer should give us more time) - I guess this is why [Islamic bank name withheld] prefer the Qard over the Amanah. Again using the Qard base current account for payment has no problem from Sharia`a point view as explained above.
First, if [Islamic bank name withheld] does not have sufficient funds available to pay a customer's cheque upon presentation to the bank, will it delay the clearing of that cheque? Do the current account terms make this clear? Second, based upon your legal position, a current account customer of [Islamic bank name withheld] cannot say that he has "£100 of money in his bank account". He can only say that he has "made a loan of £100 to [Islamic bank name withheld]" and that in fact he has "no money" in his bank account. The customer's cheque is therefore an instruction to transfer a debt. The rules of debt transfer should therefore apply when using cheques. If scholars elsewhere have thought otherwise, they should think again.
>> Whether the legal debate in England goes either way, this should not affect our understanding.
The long-running legal debate in England is smoke that emanates from a fire. Muslims must learn the history of this debate in order not to fall into the same trap.
I understand that you are busy, but would be happy to receive your final answers in order to draw this discussion to a close. I would then like to publish all of our correspondence with the identity of [Islamic bank name withheld] and yourself hidden. This is a vital subject for the Ummah to understand. Students and professionals alike should have the chance to make up their minds based on discussions that are open and to the point.