Financial Intermediation

Financial intermediation plays important roles in dealing with the complexity of modern business transactions. The primary roles of the financial intermediation are the transformation of asset, conducting of payments, brokerage and transformation of risk. Historically, it had realized since 400 years ago with the establishment of the first conventional banking namely Banco Della Pizza at Rialto, Venice in 1587. In the very early days, it was only functioning to facilitate the business traders in term of ‘payment’ and safekeeping. However, the nature of financial intermediation has drastically changed over the past three decades due to the globalization and liberalization in business activities.

Basically, the conventional financial intermediation operates under ‘the interest based lending and borrowing’ between the surplus users of funds and deficit users of funds. The former is called creditor and the latter is called debtor. Thus, it seems more emphasized on the relationship between the creditor and debtor. The ‘interest’ is treated as a ‘fixed price’ for the loan giving to the debtor and also as a return for ‘putting off’ today’s consumption to get a fixed return in the future.

A majority of Muslim scholars agreed that interest can be treated as riba’ and being interchangeably used for one another. Even, there is a modern Muslim Scholar like ‘Sheikh Tantawi who just passed away few days ago classified ‘interest’ not as the same with riba’. Muslims nowadays are more favorable to the opinion of majority that riba’ and interest are sharing ‘the same boat.’

The ground of the practice is the interest based lending and borrowing from the surplus users to the deficit users. The surplus users inclusive of households, firms and government will deposit or lend their surplus money to the financial intermediation with the principal and return guaranteed at a fixed interest rate. In order to deliver the promise, the financial intermediation will further lend it to the deficits users inclusive of the households, firms and government with the latter promise to guarantee the payment of principal together with the ‘rewards’ at fixed interest rate imposed by the former. The deficit users are charged at a higher rate and above the rate that are given to the surplus users. The two ‘different rates’, then will be the ‘gross profits’ of the financial intermediation.

By the arising of awareness to practice Islam a way of life among the Muslims over the world, efforts to derive interest-free banking principle had been taken place by Muslim scholars with the basic guidelines of al-Qur’an and as-Sunnah of the Prophet Muhammad (SAW). Amongst the principles that had been derived for the purpose of eliminating riba, gharar and maisir elements are such as mudharabah, musharakah, wadiah, amanah, wakalah, kafalah, rahn and hawalah. These principles have been suited with current needs of the Muslims by the Islamic financial intermediation as to gradually away them from the usage of conventional financial intermediation for so long.