Herald of Steel

The reason why the two types of banks had such different views towards their depositors’ money was firmly due to the different methods of their remuneration distribution. Continue your journey on Freewebnovel

The traditional banks guaranteed the money of their clients and even promised a fixed return no matter what. So in return, they were free to do whatever they wanted, spending the money is any investments they saw fit.

The Islamic banks however did not make such strong promises, instead offering a type of profit and loss sharing deal.

Hence just like shareholders were allowed to vote on any decision the company makes, the clients were allowed to get involved in the investing functions of the bank.

This difference in their operations can be further understood by looking at the following example-

Imagine one day you go to a trusted friend of yours and give him 10,000 dollars worth of jewelry for safekeeping… for whatever reason.

Maybe there had been a string of high profile robberies and you are afraid of you being next.

But somehow, out of sheer bad luck, it is that friend’s house that is robbed the very next day and he loses everything, including your jewelry.

Now would it be reasonable for you to demand your 10,000 dollars back?

You voluntarily put the valuable with your friend and he took all the reasonable security precautions- kept it in a safe, hid the key, and did not go around flaunting about it.

It was an honest to goodness theft, and the result affected both.

The friend lost everything and you lost your 10,000 dollars.

Thus at that point, your only option would be to swallow the loss and move on.

Now imagine the reverse.

Instead of you going to the friend, he comes to you, asking for a loan of 10,000 dollars.

Let’s say he hopes to invest in a business and proposes to give you 11,000 dollars a year later

in exchange for you lending him the money now.

You agree, but just as he is going home, he gets robbed and loses your money.

Now would it be reasonable for you to demand your 10,000 dollars back?

Of course!

You lent him the money and the moment he put the notes into his pocket, whatever happened became his business.

You were not responsible for it.

And this is exactly how traditional banks work.

When you deposit money into a bank account, you are not really ’depositing’ it, you are loaning it.

They might call it a deposit to make it appear fancy but really, but you are giving the bank your money with the condition that they can invest it on your behalf and will give you a fixed amount in return. ᚱΑɴỔВĘŜ

So if you deposit 10,000 dollars, the bank will just keep 10%, 1,000 dollars in cash to maintain a basic level of liquidity in order to meet its most urgent obligations and loan out of the rest of the 9,000 to businesses for a higher interest.

This is also the reason why banks can decline to give your own money back if you suddenly ask for a large amount.

This is the same as loaning that friend money for a business and then suddenly asking for it back one day.

Of course you are not going to get your money.

You need to call three days ahead of time, explain why you need the money and then, if that friend thinks he can gather enough cash within the time, might you get the ’privilege’ of getting your money back.

The same happens with traditional banks as well.

And that is why they will ask ten times before letting you withdraw your own money… because every dollar siphoned is one dollar lost from their investment.

As for what happens when that investment matures….

Well the deal is they keep whatever profit they came after paying you your fixed amount for themselves.

And if they take a loss, well theoretically, they are supposed to absorb it.

’Your money is safe with us!’ All banks promise.

Only such a beautiful condition merely existed on paper.

In reality, whenever the banks make a profit, they pocket all of it.

But if they make a loss, they rarely use their previous earnings to reimburse their clients.

They would rather let a bank run happen- which is what happens when the businesses that took loans are unable to pay back the money and so the clients whose money was invested in those businesses lose everything.

And then wait for the government to intervene, who would then use taxpayer money to make the depositors whole.

Which is just indirectly fattening the bank owners’ pockets.

As an example, this is exactly what happened during the 2008 financial crisis- regular people suffered while the bank managers made away with millions if not billions, with very few getting ever called out to court for it.

The best the governments did was put in some regulations to… if not stop at least curb this blatant cheating.

But the biggest of the cheaters were never held responsible.

So at least in this example- the Islamic banks were a lot fairer to their clients.

Yes, you had the chance of losing your money, but you also had the chance of making a lot more money. You were even given some say in how you made your money, so win or loss, you had some control.

Whereas traditional banks in reality only gave you the chance to lose money, while giving you a paltry fixed amount.

….

This was the way business loans worked in the two financial systems.

Now what about a loan where there is no profit generation- such as buying a house, car, or land?

The traditional banks can charge interest as usual ones no problem, but for the Islamic ones, it becomes tricky.

There is no business dividend to have here.

So in that case- what the banks will do is they will buy the object you want and then sell it back to you for an increased price.

Take the example of a mortgage.

Say you want to buy a house whose market value is 500,000 dollars.

The Islamic bank will then go buy that house for you for 500,000, and then sell it back for a pre determined price, say 1 million dollars.

Again, there is no restriction on how much the bank can charge as long as the two parties agree beforehand.

Then once the price is agreed, you can pay that 1 million dollars in fixed installments for whatever agreed period of time… 15, 20, 30, or 50 years… that is also up to the two parties to decide.

Now you might be asking how is this different from a traditional mortgage.

Is it not just interest only in a cumulative form?

Well as they say the devil is in the details.

First of all, before the bank can sell you the house- it has to own it.

This is due to another ruling the Muslims have- which is you are not allowed to sell something you do not possess…which as a side note makes things like drop shipping also haram.

Hence before offering you that 1 million dollar price tag, they need to buy that house from its owner.

And during this process, they cannot ask you to make any sort of commitment- so no asking for even a 1% deposit or just signing a paper saying you have to buy it.

This is totally prohibited.

The client has to be given full freedom to back off the deal at any time during the process.

So if the banks buy the house for you and then at the last moment you say,

’I changed my mind. I don’t like the neighborhood anymore.’ or ’My kids don’t want to leave their friends.’ or ’My mother does not like the congestion here, the bank cannot say anything.

Whatever the reason might be, you are free to back out of the deal anytime.. until you sign the paper pledging to that 1 million price point.

This is the first difference.

The second is what happens if you cannot pay back the money.

With traditional banks, once you fall behind your payments, they can start doing a lot of things- such as charging late fees, changing the amount one pays, extending the term of the mortgage, or even repossessing the house to make their money back.

However with Islamic banks, much of this is not possible.

Because the iron rule is that there is no way to change the agreed price.

The sky may come crashing down but that 1 million dollar price tag that was agreed at the start of the deal will remain 1 million dollars.

Whether you pay it in 10 years, 15 years, or 30 years does not matter.

It is permissible to reduce the price a bit if the client pays the amount quickly.

So the bank might offer a 100,000 dollar discount if the loan is paid 3 years before the deadline as a way to incentivize repayment.

But if someone took a 15 year loan and then was unable to pay it back, turning it into a 30 year loan, even then the price cannot be changed a single penny.

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