Abstract:
The reason why conventional banking charges interest rate to borrowers is because it has to pay interest to depositors. Islamic banking deceivingly takes adaptive reform approach to circumvent riba (interest) by substituting an interest-bearing loan into multiple trade transactions. Yet, the trade transactions are not inter-independent and “mechanically arranged” to eliminate 100% of the trading risks as banks are prohibited from trading activities in the first place. Notwithstanding this, Muslims around the globe have no other choice but to adhere to the current adaptive reform. The growth of Islamic banking shows the dire need for shariah (Islamic law) compliant products despite its shortcoming. That is the reason why many Islamic scholars are looking for a better solution in combating riba in the banking system in which the depositors gain at the borrowers expense. This empirical analysis proposed Zakat banking to take transformational reform approach to riba in banking by synthesising zakat into qardan hasana (interest free loan). It starts with the concept that depositors are obligated to pay zakat 2.5% per annum on their deposits instead of gaining interest as in conventional banking or “profit” as in Islamic banking. Depositors then allow Zakat banking to acts as an Amil (zakat collector) to collect zakat and channels the money to the authority after deducting 1/8 of the bank's entitlement. This makes Zakat banking costs of fund equal to zero; therefore, it can lend the balanced deposited pool of money to borrowers at zero rate of interest. In short, when the depositors pay zakat, the borrowers will enjoy qardan hasana. Conversely, to make profit, Zakat banking would charge on competitive basis for the various value added payment systems such as money withdrawal, money transfer, account keeping etc. instead of relying on the interest spread between depositors and borrowers.
