Salman Ahmed Shaikh
In consumer behavior, there are two important aspects from Islamic economics perspective that must be understood. First aspect is related to the ‘choice set’ and second aspect is related to the ‘budget constraint’.
Limit on Choice Set
Islam discourages lavish consumption, i.e. Israaf (extravagance even in lawful things) and Tabzeer (consumption in unlawful things like intoxicants). Islam encourages modesty and balance in life. Islam encourages spending on society with explicit directives for charity. Allah promises great rewards for charity. Belief in afterlife expands the decision making horizon for a consumer and the consumer is promised compounded increase in utility for forgone consumption and charity payments in this world after fulfilling one’s own needs.
Limit on Budget Constraint
Islamic principles discourage indebtedness unless it is ‘necessary’. Following Ahadith show the viewpoint of Islam on indebtedness, especially when it is beyond one’s capacity to repay. These Ahadith provide the guidelines as to what extent indebtedness should be avoided and used to meet only one’s necessary requirements.
Prophet Muhammad (pbuh) said:
“O Allah! I seek refuge with Thee from sin and debt.” [Sahih Muslim]
The Prophet Muhammad (pbuh) said:
“After the grave sins which Allah has prohibited, the greatest sin is that a man dies while he has debt due from him and does not leave anything to pay it off, and meets Him with it.”
Following supplication is related to the Prophet Muhammad (pbuh) for salvage from debt:
“O Allah! I seek refuge in You from all worry and grief. I seek refuge in You from incapacity and slackness. I seek refuge in You from cowardice and niggardliness, and I seek refuge in You from being overcome by debt and being subjected to men.”
Implications for Islamic Finance
But, the currently practiced Islamic finance contracts used widely are based on debt based financing than equity financing.
Some financial institutions in Islamic countries have developed Islamic credit cards for consumer financing. Problem arises due to the fact that credit cards could be used for impulsive buying or even fulfillment of one’s needs which may not involve a tangible asset. Even when a transaction may involve a tangible asset, it is hard to fulfill all the necessary requirements of debt based modes of finance like Murabaha, Diminishing Musharakah and Ijarah in quick time.
One way to deal with it is to use no mode of financing and simply offer it as a ‘convenience’ product and charge a transaction fee.
But, charges must be realistic and must not be too high. It also must be noted that a credit is still provided to the customer (else it will be same as a debit card), but an additional amount can not be charged over the credit amount. Then, the charges so taken from the customer must be transaction specific and not time specific preferably. In current practice, they are time specific. Monthly charges have to be paid irrespective of whether one uses the card or not.
Furthermore, the product that provides the same convenience ‘debit card’ is free of any cost nowadays. If credit card is marketed as a ‘convenience product’ and a transaction fee is charged, it would imply for all practical purposes that it is in lieu of credit facility and not in lieu of convenience provided since such convenience is provided by the same banks free of any costs in ‘debit cards’ anyways.
As a matter of fact, banks want to make profit out of the business of providing finance, even for consumption purposes. Fiat money based monetary system with fractional reserve banking at its core requires consumerism for credit expansion. This is not the preferable path to follow looking at the various principles and philosophy of Islamic faith. Islamic economics and its principles and objectives may very well be increasingly undermined if such path is taken too far.