Engineer Riyad Al-Rabiah, Vice Chairman of the Board of Directors and Managing Director of Saudi Pipe Company, presented a method of interest-free banking he called the ”positive approach” during a plenary session yesterday as part of the Al-Baraka Islamic Banking Symposium.
Al-Rabiah told “Al-Eqtisadiah” that the initiative he proposed could solve the housing crisis and help citizens own homes without incurring additional debt that would haunt them for the rest of their lives. as positive financing circulates money, keeps contractors and real estate agents busy, and enables citizens to own or pay rent for their homes, while also reassuring landlords that they will receive their money.
Al-Rabiah added: “But the most important thing is for a person to have a good credit history, as those who struggle to repay debts will not benefit from positive financing due to the accumulation of interest on their debts, especially those who buy expensive cars to pay off their debts only to see them pile up.“
He continued: ”Positive credit allows a person to borrow at the same interest rate without an increase in the price of goods compared to the cash price, It also increases companies“ sales and reduces their accounts receivable, boosts banks” income, lowers their risk, and promotes balanced activity in the national economy.
Al-Rabiah explained the Islamic banking method with an example: A businessman was offered a 2% interest rate by the bank on his deposit for one year, so he asked, ‘What will you do with this deposit?’ The bank replied, “We will add our 4% commission and lend it out at 6%.” The businessman then offered the bank 4% of every transaction he made, and provided them with a list of his customers so they could offer them interest-free credit to increase customer purchases from the businessman. With this deposit, customers can buy goods from the businessman four times a year, and if he makes a 5% profit each time, the businessman will earn 20% annually.
If I pay you your 4% commission annually, I will still have a 16% annual return on this deposit. Isn’t that better than the 2% interest you initially offered me, which benefits neither me, nor the bank, nor the borrower, God willing?
This was a simple example of positive banking illustrating its basic concept, and there are many developments to this idea that increase its effectiveness and ease of use. The difference between this transaction and standard banking transactions is that the bank’s income in positive banking comes from the depositor with the positive balance, not from the borrower with the negative balance. That is why these transactions are called positive banking transactions.
The originator of the idea says: “Linking the commission to sales and decoupling it from the deposit has given positive banking the flexibility it needs to serve both depositors and borrowers, and has removed the awkwardness that might arise from requiring the borrower to purchase from a specific merchant who is a depositor, which could raise suspicions of usury or place the borrower at the mercy of the depositor regarding price, quality, service, or delivery time. It also gave the buyer the usual freedom of choice in purchasing that they would find when using loans from other banks.”
Al-Rabiah compares positive banking with traditional and Islamic banking, stating: “The concept of positive banking is based on the principle of not dealing with usurious interest, whether as a taker or a giver. It is also independent of conventional and Islamic banking, and this is clearly evident in the source of positive banking’s returns, which always comes from depositors, unlike the returns in conventional banking, which come from borrowers, and also unlike the source of returns in Islamic banking, which mostly comes from those seeking financing—with the exception of cases where Islamic banks act as partners with depositors.”
He continued: “One of the results of these transactions is that they will stimulate the national economy rather than having many deposits flow out of the Kingdom. What distinguishes this transaction is that the borrower pays no interest and purchases at the cash price without a price increase for the forward sale, The seller bears the bank’s expenses and is happy to do so because they will be compensated and will see an increase in sales. The seller can also share the risk with the bank, thereby reducing the risks for the banks.
As for the bank’s guarantees, procedures, and forms, they are the same as those used for standard facilities, but without interest. Regarding additional guarantees, there is the possibility of obtaining a mortgage because these facilities are interest-free.
He explained that the bank will receive 4% annually, and that the deposit is used four times a year for purchases within the Kingdom. This means the bank will receive 4% four times a year = 1% every three months or per transaction.
If the bank’s commission becomes 1% of each sales transaction instead of 4% per year, this will incentivize the bank to quickly finance customers rather than hold onto the deposit, as well as to select customers who can increase their use of credit facilities for multiple transactions per year, which increases the bank’s commission and, consequently, the merchant’s return on the deposit. Since the bank can offer the same credit facilities to these customers’ clients for the same goods, they can increase their sales, thereby doubling its commission from the same deposit, reducing risks, and minimizing the need to provide additional credit facilities to everyone—all without charging interest to the borrower.
These facilities can also be used to pay rent, finance contractors, purchase furniture, home appliances, and cars, build homes, implement productive projects, and even repay previous debts.
He continued: “The beauty of it is that positive banking is fully in line with banking regulations and the Monetary Agency’s rules; it does not require new legislation, but rather the conviction of government officials or decision-makers, and their belief that the indirect returns will be greater and more significant.”
Al-Iktisadiya