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FATW A ON

BAN KI N G

AND THE USE OF I NTEREST

RECEI VED ON BANK DEPOSI TS

BY UMAR I BRAHI M VADI LLO

Oct ober 2006

F

A

T

W

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Ta ble of Con t e n t s

1 . I n t r odu ct ion ... 3

2 . Th e I ssu e ... 7

3 . Un de r st a n din g Riba ... 1 0

3.1 A world shaped by Riba ... 10

3.2 What is Riba? ... 11

4 . Th e M isu n de r st a n din g of Riba ... 2 0

4.1. Religious reform ism and capit alism ... 20

4.2 The I slam ic Reform ers ... 23

4.3 The followers of Reda ... 27

4.4 The m isunderst anding of Riba an- nasiah t oday ... 28

4.5 Equat ing Riba t o int erest in a loan ... 33

4.6 I slam ic Banking ... 34

4.6.1 I slam ic Banks are banks ... 34

4.6.2 Murabaha: what it is and what it is not ... 38

4.6.3 How t he I slam ic Bank’s version of t he cont ract of Murabaha

cam e int o being ... 41

4.6.4 The danger of m aking principles out of cont ract s ... 46

4.7 The St ages of t he “ I slam isat ion” process ... 48

4.8 On t he m et hodology of m odernism ... 49

5 . Un de r st a n din g Pa pe r M on e y ... 5 4

5.1 Paper m oney backed by gold and silver ... 54

5.2 Devaluat ion in paper m oney ... 60

5.3 Paper m oney wit h no backing, but only St at e legal com pulsion

... 61

6 . Th e I sla m ic M u ’a m a la t ... 6 3

6.1 The I slam ic business cont ract s ... 65

6.1.1 Shirkat ( Part nership) ... 67

6.1.2 Qirad ( business loan) ... 73

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1 . I n t r odu ct ion

Riba ( usur y) has been clearly and explicit ly pr ohibit ed in t he Qur’an

and Sunna. Allah and His Messenger, sallallahu alayhi wa sallam , have

declared w ar on t hose who do not abst ain from it .

These are som e of t he relevant ayat s regarding Riba. Allah says in t he

Qur'an:

Alla h o b lite ra te s rib a b ut He m a ke s sa da q a g ro w in va lue ! Alla h do e s no t lo ve a ny pe rsiste ntly ung ra te ful wro ng - do e r.

Q ur'a n (2, 275)

O yo u who b e lie ve ! Sho w fe a r o f Alla h a nd fo rg o a ny re m a ining rib a

if yo u a re b e lie ve rs.

Q ur'a n (2, 277)

If yo u do no t, kno w it m e a ns wa r fro m Alla h a nd His Me sse ng e r. If yo u turn in re pe nta nc e yo u m a y ha ve yo ur c a pita l,

witho ut wro ng ing a nd witho ut b e ing wro ng e d.

Q ur'a n (2, 278)

O yo u who b e lie ve ! Do no t fe e d o n rib a, m ultiplie d a nd the n re m ultiplie d.

Sho w fe a r o f Alla h

so tha t pe rha ps yo u m a y b e suc c e ssful.

Q ur'a n (3,130) Tho se who pra c tic e rib a will no t rise fro m the g ra ve

e xc e pt a s so m e o ne drive n m a d b y Sha yta n's to uc h. Tha t is b e c a use the y sa y, "Tra de is the sa m e a s rib a." But Alla h ha s pe rm itte d tra de a nd He ha s fo rb idde n rib a. Anyo ne who re c e ive s a wa rning fro m his Lo rd a nd the n de sists, c a n ke e p wha t he re c e ive d in the pa st a nd his a ffa ir is up to Alla h. But a ny who re turn to it will b e the C o m pa nio ns o f the Fire ,

re m a ining in it tim e le ssly, fo re ve r.

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Rasulullah, sallallahu alayhi wa sallam , said t he following concerning

t he gravit y of Riba:

Abu Hurair a said t hat t he Messenger of Allah, sallallahu alayhi wa

sallam , said: “ Riba is of sevent y different kinds, t he least grave being

equivalent t o a m an m arrying ( i.e. having sexual int ercourse w it h) his

own m ot her.”

( t ransm it t ed by I bn Maj ah, Baihaqi)

Abdallah ibn Hanzala report ed t hat t he Messenger of Allah, sallallahu

alayhi wa sallam , said: “ A dirham of Riba, which a m an receives

knowingly, is worse t han com m it t ing adult ery t hirt y- six t im es.”

( Ahm ad) Baihaqi t ransm it t ed it , on t he aut horit y of I bn Abbas, wit h

t he addit ion t hat t he Prophet , sallallahu alayhi wa sallam , cont inued t o

say: “ Hell is m ore fit t ing for him whose flesh is nour ished by t he

Haram .”

( t ransm it t ed by Ahm ad)

Abu Huraira report ed t he Messenger of Allah, sallallahu alayhi wa

sallam , as saying: “ On t he night I was t aken up t o heaven I cam e

upon people whose bellies w ere like houses which cont ained snakes

which could be seen from out side t heir bellies. I asked Jibril w ho t hey

were and he t old m e t hey were people who had consum ed Riba.”

( t ransm it t ed by Ahm ad, I bn Maj ah) Be c a use o f wro ng do ing o n the pa rt o f the Je ws,

We m a de unla wful fo r the m so m e g o o d thing s whic h ha d pre vio usly be e n la wful fo r the m ;

a nd b e c a use o f the ir o b struc ting m a ny pe o ple fro m the wa y o f Alla h, a nd b e c a use o f the ir pra c tising rib a whe n the y we re fo rb idde n to do it, a nd b e c a use o f the ir c o nsum ing pe o ple 's we a lth b y wro ng ful m e a ns. We ha ve pre pa re d a pa inful punishm e nt

fo r tho se a m o ng the m who re je c t.

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Sam ura bin Jundab r eport ed t hat t he Messenger of Allah, sallallahu

alayhi wa sallam , said: “ This night I dream t t hat t w o m en cam e and

t ook m e t o a holy land whence we proceeded on t ill we reached a river

of blood, w here a m an w as st anding, and on it s bank w as st anding

anot her m an wit h st ones in t his hand. The m an in t he m iddle of t he

river t r ied t o com e out , but t he ot her t hr ew a st one at his m out h and

forced him t o go back t o his original place. Whenever he t ried t o com e

out t he ot her t hrew a st one at his m out h and forced him t o go back. I

asked: “ Who is t his?” I was t old: “ The person in t he river was one who

consum ed Riba.”

( t ransm it t ed by Bukhari)

The Messenger of Allah, sallallahu alayhi wa sallam , cur sed t he one

who t akes Riba, t he one who gives Riba, t he one who records t he

t ransact ion and t he t wo wit nesses t hereof. He said t hey are equally

guilt y.

( t ransm it t ed by Muslim )

There are of course alt ernat ives t o Riba. As Rum i once explained,

“ What is Halal is possible.” The hypocrit e – Rum i also said – is t he one

who says, “ What is Halal is not possible.” To est ablish t he Halal is an

im perat ive for every Muslim . Am ong t he I slam ic alt ernat ives for

Riba-based t ransact ions are Shirkat ( or Musharakah) and Qirad ( or

Mudarabah) . These are t he t w o m ain business cont ract s in I slam . Their

principles are known. The problem is t heir applicat ion in an

envir onm ent t hat is not suit able for t hem .

Th e a n sw e r t o t h is pr oble m is n ot t o a lt e r t h e con t r a ct s bu t t o a lt e r t h e e n vir on m e n t .

Herein lies t he m ain difference wit h our brot hers in I slam ic Banking.

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expense of t he condit ions im posed by t he Shari‘ah. They are doing t his

wrongly in t he nam e of ij t ihad and darurah.

We, on t he ot her hand, st and for t he re- est ablishm ent of t he I slam ic

environm ent t hrough t he rest orat ion of som e m issing key t ools and

inst it ut ions of t rading, which are necessary for Shirkat and Qirad t o

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2 . Th e I ssu e

Many Muslim s have int erest - bearing account s. I nt erest is w it hout any

doubt Riba and t herefore Haram . What are t he circum st ances in which

we find ourselves t hat force us t o have bank account s even t hough we

know bank account s are Haram ? How is it j ust ified? Most people claim

t hat t his is a case of darurah, t hat is, ext rem e necessit y. Darurah is a

legal inst r um ent applicable in cases of ext rem e necessit y or vit al

int erest by which a person is allowed t o act in a m anner t hat w ould

ot herwise norm ally be forbidden. The m ost crit ical charact erist ic of

darurah is t hat it is only a t em porary m easure. I f you find yourself in

t he desert and all you have is a pig t o eat , t hen it is fard ( obligat ory)

t o kill and eat t he pig. Eat ing t he pig is not Halal, it is fard. I t is a very

different t hing t o st art farm ing pigs while st ill claim ing darur ah. Once

we find ourselves in a sit uat ion of darur ah, it is obligat or y t o do

ever yt hing in our power t o m ove away fr om t hat sit uat ion. I t is not

allowed t o dwell in t he sit uat ion for ever.

The issue we are concerned wit h here is “ what t o do wit h t he int erest

t he Muslim s are receiving on t heir bank deposit s?” What is t he correct

way of dealing w it h t he int erest , given t he present circum st ances?

Most people decide bet ween t he follow ing opt ions:

1] Keep t he int erest as part of t he darurah sit uat ion

2] Give t he int erest t o charit y

3] Ret urn t he int erest t o t he bank direct ly or arrange a special

non-int erest account .

What all t hese opt ions have in com m on is t hat t hey do not change t he

st at us of darurah. They sim ply perpet uat e t he condit ion. Opt ions 1 and

2 at least help t he account holder or t he charit y beneficiaries; but

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There is a fourt h opt ion which is t he one we are proposing: t o use t he

int erest t o change t he condit ion of darurah.

W h e n a da r u r a h st a t u s is cla im e d, t h e im pe r a t ive a ct ion is t o ch a n ge t h e con dit ion n ot t o pe r pe t u a t e it . Therefore t he priorit y is t o change t he condit ion of darurah. The int erest can cont ribut e t o

changing t he st at us in which w e find ourselves obliged t o use t he bank.

How? By est ablishing t he appropriat e alt ernat ive t o t he banking

syst em . Not anot her bank, but an inst it ut ion t hat can allow paym ent s

wit hout resort ing t o banking act ivit ies. That inst it ut ion should allow us

t o perform paym ent s and savings in an I slam ic m anner.

Darurah relat es t o our econom ic environm ent . Therefore t o underst and

our pr oblem it will not be sufficient t o focus on t he com m er cial

t ransact ion, we will need t o have a wider look, exam ining t he

condit ions t hat surround t he com m ercial t ransact ion. Thus, we need t o

invest igat e how banking inst it ut ions have becom e alm ost a m onopoly

in t he cr eat ion and handling of m oney. We need t o look at t he nat ure

of t he banks, and also at t he nat ure of t he credit - m oney which we use.

Finally w e need t o underst and what m oney is in I slam , and how we

can r e- est ablish an I slam ic econom ic fram ewor k in which banks w ill

cease t o be a necessit y for us, while w e r em ain fully capable of

sat isfying all our econom ic needs.

The key t o underst anding our pr esent econom ic sit uat ion is t he

concept of Riba in t he Shari’ah. Wit hout a proper underst anding of

what is Haram we will not be able t o m ake a correct j udgem ent . To

underst and Riba we will need t o elim inat e som e com m on

m isunderst andings, such as m aking int er est ident ical t o Riba – when in

fact t he t w o concept s are not t he sam e. Making t hese t wo concept s

ident ical is part of t he confusion t hat reigns t oday in t he com m on

discourse on Riba. Expressions such as ‘int erest - free’ or ‘zero- int erest ’

do not m ean t hat t he t ransact ion is free of Riba. Such expressions are

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forbidden pract ices. We will look at t his m at t er in t he sect ion called

‘Underst anding Riba’.

Anot her im port ant m at t er is t o clearly st at e t hat I slam ic Banking is

Haram , j ust as all ot her com m ercial banks are Haram wit hout

except ion. I slam ic Banks pract ice Riba in t he sam e w ay t hat ot her

banks do, except t hat t he differences are purely cosm et ic. They

m islead com m on people by t he use of Arabic nam es and t he

m isr epresent at ion of com m ercial cont ract s as well as t he int roduct ion

of cert ain forbidden pract ices such as ‘t wo t ransact ions in one’, which

are usually not know n t o be Haram by m ost people. I slam ic Banks

dwell on t he except ionalit y of darurah in order t o j ust ify t heir own

int erpret at ion of t he Shari’ah, which validat es banking pract ices.

I slam ic Banks do not int end t o change or elim inat e t he sit uat ion of

darurah, because such a change would im ply t he end of t heir

j ust ificat ions. We will exam ine t his m at t er in great er det ail lat er when

we look at t he m et hodological rout e used by m odernist scholars in

order t o alt er t he definit ion of Riba, t herefore allowing t hem t o accept

t he inst it ut ions of banks and paper m oney.

Ult im at ely we m ust underst and t he im port ance of what is Halal, what

is t he I slam ic way of doing t hings. We have lost our I slam ic Mu’am alat

and t he only way t o rest ore t he pract ice of t he Shari’ah is t o rest ore

som e crit ical aspect s of t he I slam ic econom ic infrast ruct ure t hat m ake

t he Mu’am alat viable. Therefore t he m at t er m ust ult im at ely r esult in

t he rest orat ion of our own econom ic m odel. Wit hin an I slam ic m odel

we have t he resources t o rest or e t he right way of t rading and

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3 . Un de r st a n din g Riba

3 .1 A w or ld sh a pe d by Riba

I t is gener ally assum ed t hat from t he point of view of m at erial wealt h,

t hings have never been bet t er t han t hey are t oday. This is assum ed,

despit e j ust having t raversed t he m ost m urderous cent ury in hum an

hist ory, w hich saw for t he first t im e t he use of w eapons of m ass

dest ruct ion on civilian populat ions, t he colossal annihilat ion of t he

eco-syst em and fauna, and t he largest num bers of st ar vat ion vict im s

known in hist ory. All past and present m iseries are forgot t en before

t he general assum pt ion t hat t he average person t oday enj oys a

st andard of living not equalled in any ot her t im e. However, it has not

been t he sam e for all t he people of t he w orld. While a m at erial

im provem ent has been achieved for a relat ively sm all port ion of

m ankind, t he bot t om half st ill lives below t he povert y- line of 2 USD a

day, and earn less collect ively t han t he 387 largest individual earners.

This disequilibr ium in wealt h goes hand in hand w it h a corresponding

polit ical and m ilit ar y im balance t hat has t ur ned one nat ion in part icular

int o t he police- ruler of t he wor ld.

During t his per iod of a m assive shift of wealt h t o a sm all corner of t he

world, t he Muslim s have lost an im m ense part of t heir past econom ic

and polit ical st at us. The polit ical unit y represent ed by t he Khalifat e,

which grant ed Muslim s a voice in w orld affair s, w as devast at ed, and

inst ead a plet hora of t iny nat ions em erged under t he auspices and new

legal fram e of t he Unit ed Nat ions. Large part s of our populat ion belong

t o t he bot t om half of world earners, and our com bined Gr oss Dom est ic

Product does not reach one t ent h of t he GDP of t he USA. Polit ically

divided, and losers in t he econom ic share- out , Muslim s face only t he

prospect of being underdogs in t he present econom ic syst em . Under

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inevit able, which in t urn result s in t he increased anger and fr ust rat ion

of our yout h.

This present syst em of econom ic disequilibrium is self- pr eserved by

diver t ing people’s at t ent ion away from econom ic m at t ers and t owards

polit ical m at t ers. The econom ic syst em which causes t he im balance is

t aken for grant ed, and individual polit ical t yrant s becom e t he focus of

polit ical st ruggle. Under t hese circum st ances t he econom ic syst em

rem ains unquest ioned and t herefore it s cont inuat ion is guarant eed.

At it s core, t his syst em of disequilibr ium w hich w e call capit alism is

based on Riba. Riba is in it self disequilibrium . Mechanised usury

t hrough t he banking syst em has t urned a crim inal cont ract int o a

m eans of econom ic dom inat ion. As long as we r em ain slaves of Riba,

our Muslim nat ion will rem ain enslaved.

A societ y which m isunderst ands t he dynam ics of t he world w ill find it

difficult t o focus on est ablishing it s goals. These are swept away in t he

em ot ion of t he m om ent . And so, act s which are int ended ‘t o do good’

are lost t o a lack of direct ion. Under such circum st ances, no am ount of

effort w ill prove fruit ful.

3 .2 W h a t is Riba ?

Underst anding Riba is essent ial t o underst anding capit alism and t hus

t o com prehending t he econom ic environm ent in w hich we operat e. The

I slam ic underst anding of Riba opens t he pat h t o rest oring our own

Mu’am alat and t hus creat ing t he t ools t hat can overcom e t he present

syst em . Riba is not j ust negat ive. I t opens t he pat h t o t he posit ive

const ruct ion of t he Halal. Only while w e rem ain confused bet w een t he

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The basis of t he argum ent against Riba is what Allah says in t he

Qur'an ( Surat al- Baqara, 274) :

“ Allah has perm it t ed t rade and forbidden Riba.”

Riba represent s t he opposit e of t rading, it is t he corr upt ion of t rading.

There cannot be t rading w it h Riba, nor Riba wit h t rading. Yet , Riba has

becom e t he core of t oday’s face of kufr: capit alism . For t his reason,

Riba is t he m ost im port ant polit ical issue facing our Muslim nat ion

t oday. Riba affect s every aspect of our life and it can be t raced back t o

t wo m ain inst it ut ions: t he Bank and t he St at e. Despit e it s im port ance,

m ost Muslim s’ under st anding of it rem ains superficial. Most people

sim ply t hink t hat Riba is m er ely int erest . The realit y of Riba is a m uch

m ore com plex affair. This m isunderst anding is not j ust a

m iscalculat ion; it is t he product of a m is- educat ion and indoct r inat ion

which has result ed from t w o phenom ena: one, t he dest ruct ion of t he

polit ical power of t he Khalifat e, and t wo, t he process of t he so- called

‘I slam ic reform ’ which followed. This m isunderst anding opened t he

gat es t o t he ‘I slam isat ion’ of t he m ost im port ant inst it ut ion of

capit alism : t he bank. What t he open m arket - place is t o t rading, t he

bank is t o Riba. A ‘reform ed Riba’ was t o allow t he new prom ot ers of

t he ‘I slam ic Bank’ t o j ust ify t heir act ions. I t is for t his reason essent ial

t o ret urn t o a cor rect under st anding of t his key t er m in t he Fiqh, which

can allow us t o discern what is Haram and what is Halal. This is crucial

t o over com ing capit alism and it s illusion of power.

This brief int roduct ion will t r y t o out line as plainly as possible t he issue

of Riba in I slam ic Law , and undo t he m isunderst anding creat ed by t he

‘reform ers’ and m odernist scholars.

Riba lit erally m eans ‘excess’ in Arabic. Qadi Abu Bakr ibn al- Ar abi, in

his ‘Ahkam ul Qur’an’, defines it as: ‘Any excess bet w een t he value of

t he goods given and t heir count er- value ( t he value of t he goods

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1] An ext ra benefit arising from unj ust ified increase in t he w eight or

m easure, and

2] An ext ra benefit arising from unj ust ified delay.

These t wo aspect s have led our scholars t o define t w o t ypes of Riba.

I bn Rushd said:

“ The j urist s unanim ously agreed about Riba in buyu’ ( t rade) t hat it is

of t w o kinds: deferm ent ( nasiah) and st ipulat ed disparit y ( t afadul) .”

That is t o say, t here are t w o t ypes of Riba:

1] Riba al- Fadl ( excess of disparit y)

2] Riba al- Nasiah ( excess of deferm ent )

Riba al- fadl refers t o quant it ies. Riba an- nasiah refers t o t im e delay.

Riba al- fadl is very easy t o underst and. I n a loan, Riba al- fadl is t he

int erest t hat is overcharged. But in general it represent s when one

part y dem ands an addit ional increase t o t he count er- value. One part y

gives som et hing w or t h 100 in exchange for som et hing wort h 110. Riba

al- fadl also refers t o t he forbidden case in which t wo sales t ransact ions

are linked by a single cont ract ( known as ‘t wo t r ansact ions in one’) , in

which one part y is obliged t o sell som et hing at one price and t o resell

it aft er a t im e t o t he original seller for a decreased value. As a m at t er

of fact , t his is only a subt er fuge t o disguise a loan w it h int erest under

t he pret ence of a sale. Nobody needs t his subt erfuge t oday because

you can get t he loan direct ly from t he bank. But t he I slam ic Banks

have resort ed t o t his old t rick t o deceive t heir cust om ers under t he

m isint erpr et ed nam e of ‘Murabaha’.

Underst anding Riba an- nasiah is m ore subt le. I t is an excess in t im e

( delay) art ificially added t o t he t ransact ion. I t is an unj ust ified delay.

This refers t o t he possession ( ‘ayn) and it s non- possession ( dayn) of

t he m edium of paym ent ( gold, silver and foodst uff – which was used

as m oney) . ‘Ayn is t angible m er chandise, oft en referred t o as cash.

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paym ent is delayed. To exchange ( safr) dayn for ‘ayn of t he sam e

genus is Riba an- nasiah. To exchange dayn for dayn is also forbidden.

I n an exchange it is only allowed t o exchange ‘ayn for ‘ayn.

This is support ed by m any hadit h on t he issue. I m am Malik relat ed:

“ Yahya r elat ed t o m e from Malik t hat he had heard t hat al- Qasim ibn

Muham m ad said, ‘Um ar ibn al- Khat t ab said, “ A dinar for a dinar, and a

dirham for a dirham , and a sa' for a sa'. Som et hing t o be collect ed

lat er is not t o be sold for som et hing at hand.” ’”

“ Yahya relat ed t o m e from Malik t hat Abu'z- Zinad heard Sa'id al

Musayyab say, ‘There is usur y only in gold or silver or what is w eighed

and m easured of what is eat en and drunk.’”

The Hanafi scholar Abu Bakr al- Kasani ( d. 587H) wrot e:

“ As for Riba al- nasa’ it is t he difference ( excess) bet ween t he

t erm inat ion of delay and t he period of delay and t he difference

( excess) bet ween t he possession ( ‘ayn) and non- possession in t hings

m easured and weighed wit h different genera as well as in t hings

m easured and weighed wit h a uniform it y of genera. This is according

t o ash- Shafi’i ( Allah bless him ) , it is t he difference bet w een t he

t erm inat ion of t he period and t he delay in foodst uff and precious

m et als ( wit h currency- value) specifically.”

Riba an- nasiah refers part icularly t o t he use of dayn in t he exchange

( sarf) of t he sam e genera. But t he prohibit ion is ext ended t o sales in

general when t he dayn represent ing m oney overpasses it s privat e

nat ure and replaces t he ‘ayn as m edium of paym ent .

I m am Malik, m ay Allah be m er ciful t o him , illust rat es t his point in his

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“ Yahya r elat ed t o m e from Malik t hat he had hear d t hat receipt s

( sukukun) were given t o people in t he t im e of Marw an ibn al- Hakam

for t he produce of t he m arket of al- Jar. People bought and sold t he

receipt s am ong t hem selves before t hey t ook delivery of t he goods.

Zayd ibn Thabit , one of t he Com panions of t he Messenger of Allah,

m ay Allah bless him and grant him peace, went t o Marwan ibn Hakam

and said, ‘Marwan! Do you m ake usur y Halal?’ He said, ‘I seek r efuge

wit h Allah! What is t hat ?’ He said, ‘These r eceipt s which people buy

and sell before t hey t ake delivery of t he goods.’ Marw an t herefore sent

guards t o follow t hem and t ake t hem from people’s hands and ret urn

t hem t o t heir ow ners.”

Zayd ibn Thabit specifically calls Riba t hose receipt s ( dayn) ‘which

people buy and sell before t aking delivery of t he goods.’ I t is allowed

t o use t he gold and silver or food t o m ake t he paym ent , but you

cannot USE t he prom ise of paym ent . I n it t here is an excess t hat is not

allowed. I f you have dayn, you have t o t ake possession of t he ‘ayn it

represent s and t hen you can t ransact . You cannot used t he dayn as

m oney.

I n general t he rule is t hat you should not sell som et hing which is t here,

for som et hing which is not . This pract ice is called Ram a’ and it is Riba.

I m am Malik: “ Yahya relat ed t o m e from Malik fr om ‘Abdullah ibn Dinar

from ‘Abdullah ibn ‘Um ar t hat ‘Um ar ibn al- Khat t ab said: ‘Do not sell

gold for gold except like for like. Do not increase part of it over

anot her part . Do not sell silver for silver except for like, and do not

increase part of it over anot her part . Do not sell som e of it which is

t here for som e of it which is not . I f som eone asks you t o wait for

paym ent unt il he has been t o his house, do not leave him . I fear ram a’

for you. Ram a’ is usury.’”

Ram a’ is t oday t he com m on pract ice in all our m arket s. Dayn currency

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Dinar, Silver Dirham ) . This pract ice is what Um ar ibn al- Khat t ab m eant

when he said “ I fear ram a’ for you.”

Selling wit h deferm ent is not rest rict ed t o m et als, it also includes food.

Malik said, “ The Messenger of Allah, m ay Allah bless him and gr ant

him peace, for bade selling food befor e get t ing deliver y of it .”

Therefore, what is pr ohibit ed in Riba an- nasiah, is t he addit ion of an

art ificial delay t hat does not belong t o t he nat ure of t he t ransact ion.

What does ‘art ificial’ and ‘t he nat ure of t he t ransact ion’ m ean? I t

m eans t hat every t ransact ion has it s own nat ural condit ions of t im ing

and price.

Riba al- fadl refers t o quant it ies. Riba an- nasiah refers t o t im e delay.

To underst and what is j ust ified and what is not j ust ified, one has t o

underst and t he different nat ure of each t ransact ion, in part icular t hose

t ransact ions t hat involve t he sam e genus ( t he sam e goods are given

and received) , such as loans, exchange and rent al:

• A loa n involves deferm ent but not quant it y disparit y. One person gives an am ount of m oney, and aft er a period of t im e ( defer m ent )

t he person ret urns t he m oney w it hout increase. The excess in t im e

is j ust ified and is Halal, but disparit y is unj ust ified and is Har am .

That t ype of unj ust ified excess would be Riba al- fadl.

• An e x ch a n ge involves no deferm ent and no disparit y. One person gives an am ount of m oney and wit hout deferm ent t he equivalent

is given. Deferm ent is unj ust ified in an exchange. I f you want t o

delay t he paym ent , you have t o m ake a loan, you cannot obt ain a

loan disguised as a ‘delayed exchange’. That t ype of unj ust ified

excess would be Riba an- nasiah.

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ret urn it aft er a t im e ( deferm ent ) and in addit ion you m ake an

ext ra paym ent , t he rent ( disparit y) . These t wo excesses bot h in

t im e and quant it y are j ust ified and t hey are Halal. You can only

rent m erchandise t hat can be hired. You can hire a car, a house or

a horse. But you cannot hire m oney or food st uff ( fungible goods) .

To pret end t o hire m oney is t o corrupt t he nat ure of t he

t ransact ion and it becom es Riba. What t ype of Riba is rent ing

m oney? Riba al- fadl, because t he rent ing of m oney is t he sam e as

adding a disparit y in a loan.

I n t h e ca se of a sa le t hat involves t he exchange of goods of different genus, deferm ent is Halal, and disparit y is account ed for in a differ ent

m anner. How do you det erm ine disparit y in a sale of goods of different

genus? The disparit y is det erm ined by t he difference bet ween t he price

offered on spot sales and delayed sales. This is called in t he Fiqh t he

st ipu la t ion of t w o pr ice s or ‘t w o sa le s in on e ’. The spot price is considered t he pr ice; and t he excess occurs w hen t here is an increase

( in relat ion t o t he spot pr ice) in t he price offered in delayed t erm s.

This can happen in t he follow ing cases:

• offering an increased price if t he good are purchased on delayed t erm s; or

• offering a discount if t he buyer pays on t he spot ; or

• selling only on delayed t erm s and denying t he possibilit y of purchasing on t he spot ( t hus hiding t hat t here is an increase –

as it happens in m any of t he 0% finance offer s t hat we see

t oday) .

A com plet e discussion of t his t opic follow s lat er. We will sim ply out line

t wo cases:

1 ] When t he seller says “ I sell at t his price if you pay in cash, and at t his ot her one ( higher) if you pay in delayed t erm s.”

2 ] When t he seller m akes a salam ( a sale wit h delayed paym ent , which is Halal) and at t he t im e when t he m oney is due he says t o t he

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pay an excess ( disparit y) ; ” and also when t he seller says t o t he buyer:

“ I f you pay before t he end of t he t erm s, I will offer you a discount

( disparit y) .” This is t he t ype of Riba known as Riba al- j ahiliyah. What

t ype of Riba is applicable here? Riba al- fadl – because in sales t he

sour ce of unj ust ified excess is disparit y.

I bn Rushd wrot e:

“ As for usury in sales, t he ulam a are in agreem ent t hat it is of t wo

t ypes: deferred paym ent ( nasiah) and disparit y ( t afadul) – except

what has been t ransm it t ed from I bn ‘Abbas, who report ed t hat t he

Prophet , m ay t he peace and blessing of Allah be upon him , said:

“ There is no usury except in deferred paym ent .” The m aj orit y of t he

fuqaha, however, have concluded t hat usury does exist in t hese t wo

t ypes because t his has been affirm ed in ot her st at em ent s from him ,

m ay t he peace and blessings of Allah be upon him .”

“ The four sect ions t o which t he law of usur y m ay be reduced are ( 1)

t hings in w hich neit her dispar it y nor defer m ent is perm it t ed; ( 2) t hings

in w hich disparit y is perm it t ed but deferm ent is not ; ( 3) t hings in

which bot h are perm it t ed; and ( 4) what const it ut es a single genus.”

Thus every t ransact ion has it s condit ions relat ing t o it s nat ure. You

cannot t ake t he condit ions of one t ype of t ransact ion and t ry t o apply

t hem t o t he ot her, wit hout corr upt ing t he t ransact ion. To add

unj ust ified condit ions ( also excess) t o a t ransact ion is Riba.

Since dayn is in it self a deferm ent , t he use of dayn is rest rict ed t o

privat e t ransact ions and it is pr ohibit ed as a general m eans of

paym ent ( m oney) . While dayn per se is Halal, it is not Halal t o use it as m oney. Dayn is a privat e cont ract bet ween t wo individuals and

m ust rem ain privat e and bet w een t hem . The t ransfer of dayn fr om one

person t o anot her can be done I slam ically, but only by t he elim inat ion

of t he first dayn and t he creat ion of a new one. The dayn cannot

circulat e independent ly from what it represent s. The owner m ust t ake

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in an exchange and it cannot be used as a m eans of paym ent . I t is

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4 . Th e M isu n de r st a n din g of Riba

4 .1 . Re ligiou s r e for m ism a n d ca pit a lism

Capit alism overrides religion rat her t han int eract ing wit h it . I t s

suprem acy in present societ y is so absolut e t hat expressions like

t axat ion and int erest rat es com m and m or e cert aint y t han t he

exist ence of Allah. Religions in t he process have had t o bend t heir

supposedly capricious law s in order t o subm it t o t he rat ionale of t he

banking or der. Com ing out of revolut ions, wars and econom ic disast ers,

capit alism has m anaged t o im pose it s st ruct ures all over t he w orld. I t s

success is so t ot al t hat it has m anaged t o elim inat e any int ellect ual

resist ance. The disappearance of t he kings ( represent ing t he link t o

t radit ional law) and t he arr ival of dem ocr acy provided t he fert ile

grounds for t his m assive re- shaping of t he world wit hin a capit alist

rat ionale.

The full ext ent of t his accom plishm ent t ransfor m ed t he previously

unt ouchable dom ain of r eligion. Capit alism ’s rat ionale ent ered int o t he

j udgm ent of religion t o t he degree t hat capit alism w as accept ed as an

‘endowm ent of God’: a self- evident evolut ion of hum an societ y, j ust

like t he locom ot ive or t he radio. The key t o t his effort was t he

adapt at ion of t he t radit ional pr ohibit ion of usury t hr ough a car eful

redefinit ion of t he t erm . This ‘conversion’ t o capit alism was com plet ed

in christ ianit y during t he com plex process of Reform or Prot est ant ism .

The principal result s of t he conversion wer e t he ‘christ ianisat ion of

banking’ and t he reduct ion of Canon Law t o personal purit an m oralit y.

Muslim s also had t heir own ‘prot est ant ’ reform . Our reform ers adopt ed

t he sam e pat t ern; t he adopt ion of purit an m oralit y cant ered

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What we call m odernism in I slam is sim ilar t o what Prot est ant ism is t o

t he christ ian world. The t wo phenom ena share t he sam e m ould and

t he sam e accom plishm ent w it h regard t o capit alism . At t he cent re of

t his issue was a redefinit ion of t he m eaning of usury t hat would allow

banking t o be accept ed as part of t he religion.

Two t hings were required for banking t o be religiously accept ed:

1] Accept ance of t he int erest charged on t heir loans, eit her explicit ly

or by disguise.

2] Accept ance of fract ional reserve banking, t hat is, t he syst em of t he

creat ion of prom issor y not es as subst it ut es for specie ( originally, gold

and silver) .

Canon Law , as inherit ed from scholast ic writ ers and t he fat hers of t he

christ ian church, regarded t he m at t er of usury as being alm ost

ident ical t o int erest . This int erpret at ion was already a depart ure from

t he m ost com prehensive Arist ot elian ‘paradigm ’ t hat dem anded t hat

t he value and t he count er- value m ust be ident ical. The Arist ot elian

view was gradually abandoned in favour of a sim pler and m ore

pract ical definit ion of ‘usur y as int erest ’. Finally t he Prot est ant

revolut ion redefined usury from being any int erest ( independent of t he

am ount ) t o only ‘excessive int erest ’. The Prot est ant int erpr et at ion

consent ed t hat any int erest t hat was in accordance wit h t he m ar ket

rat e was perm issible, and only t he int erest t hat was in ‘excessive’

disparit y t o t he m arket was consider ed usury. But in pract ice, wit hout

an upper lim it beyond which people can agree t hat usury is t aking

place, t he definit ion has proved point less.

The Arist ot elian definit ion offers very close parallels t o t he I slam ic view.

Qadi Abu Bakr ibn al- ‘Arabi defines usury as: “ Any unj ust ified

increm ent bet ween t he value of t he goods given and t he count

er-value.” The general idea is t hat alt hough individuals have subj ect ive

and dist inct appreciat ions of goods, in a j ust t ransact ion t here m ust be

equivalence in t heir single ( obj ect ive as opposed t o subj ect ive)

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Arist ot elian view on t he basis of t he preference of subj ect ive value

( which was seen as t he real value) . From t he point of view of t he

subj ect ive value t he Arist ot elian ‘j ust exchange’ does not m ake sense

since all t he exchanges are by t hat definit ion non- equivalent . This is

because from a subj ect ive perspect ive t he part ies involved in t he

exchange always expect a higher ‘ut ilit y’ ( subj ect ive value) from t he

goods received t han from t he ones given. Thus, fr om a ut ilit ar ian

perspect ive, “ t rade is as inequit able as usury” , which is like saying

“ t rade is t he sam e as usury” . And Allah t he Exalt ed has warned us of

t he people who say “ t rade is t he sam e as usury” ( Qur’an 2: 274) .

Aft er Bent ham ’s ut ilit arianism , all int erest in what ever form was

considered perm issible. The econom ic t hinking t hat followed was

grounded upon Bent ham ’s ‘perm issibilit y of usury’. Furt herm ore, from

t his ut ilit ar ian perspect ive not only is usur y accept ed but t he or iginal

idea of equivalence is no longer relevant and is t herefore ignored. This

explains t he incapabilit y of econom ist s t o underst and t he I slam ic

definit ion of Riba, w hich is based on t he int rinsic equivalence of a j ust

t ransact ion. I t leaves econom ist s in pure perplexit y when it com es t o

underst anding t he I slam ic sense of equivalence, as expressed in

sent ences such as “ gold for gold, hand t o hand, equal for equal.” The

‘perplexit y about equivalence’ is a fact or com m on t o all econom ist s.

I n I slam t he word for usury is Riba. The m eaning of Riba in t he

Shari’ah has a m ore det ailed and com prehensive m eaning t han t he in

christ ian Canon Law. Arist ot elian equivalence is expanded and

exem plified in t he Shari’ah. The Shari’ah offers a com plet e

underst anding of t he com m ercial t ransact ion, and by default of Riba.

This expanded underst anding includes a det ailed explanat ion of t he

m eaning of excess in it s t wo for m s: dispar it y and deferm ent . By

cont rast t he under st anding of usury in t he chr ist ian world is m ore or

less defined by int erest only. I slam ic Law is m ore com prehensive and

clearer. For exam ple, in cert ain t ransact ions in which it is not j ust ified,

t he int roduct ion of an art ificial ( unj ust ified) deferm ent is seen as an

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all t he christ ian scholars of t he past . This gap in t he christ ian

underst anding was t o have im port ant consequences in how usury

would event ually penet rat e in t he christ ian world t hrough t he m eans of

banking and part icularly t he use of prom issory not es ( in t hem selves a

m eans of deferm ent ) . We want t o em phasise t he crit ical im port ance of

Riba an- nasiah as a m eans of recognising a significant form of Riba

which escaped christ ian scholars.

4 .2 Th e I sla m ic Re for m e r s

I n Egypt , during t he lat t er part of t he XI X cent ury, a group of

pseudo-scholars st art ed t heir own I slam ic ver sion of a Prot est ant refor m at ion.

Am ong ot her t hings t hey t ried t o change t he definit ion of Riba in order

t o accom m odat e t he banking pract ices of t heir day. From Muham m ad

‘Abduh t o t he m odern pro- banking scholars t here runs an

un-int errupt ed school of t eachers and st udent s, one w hich has added new

elem ent s t o t he original I slam ic definit ion, and subt ract ed exist ing

elem ent s. This school we call m odernism . Their final accom plishm ent

was t he creat ion of t he I slam ic Bank.

The inspirat ion behind t he m odernist m ovem ent is said t o have been

Jam al- ud- Din al Afghani ( 1839- 1897) , while it s brain was Muham m ad

‘Abduh ( 1845- 1905) , and t he one who propagat ed it was Rashid Reda

( 1865- 1935) . I t first appeared as a rej ect ion of West ern colonialism ,

but it s em ot ional rej ect ion of t he West w as accom panied by an

indiscrim inat e and equally int ensive adm ir at ion of t he West .

Because of his posit ion as Grand Muft i of Egypt – a posit ion grant ed t o

him in 1899 by Lord Crom er, Br it ish Gover nor of Egypt – Muham m ad

‘Abduh w as t he m ost dam aging of all. His fir st Fat wa as Grand Muft i

st at ed: “ I nt erest in saving funds is allowed” . He wrot e ( 5 Decem ber

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“ The st ipulat ed usury is not perm issible in any case; whereas t he Post

Office invest s m onies t aken from t he people, which are not t aken as

loans based on need, so it would be possible t o apply t he invest m ent

of such m onies on t he rules of a part nership in com m enda.” *

[ * com m enda is sim ilar t o Qirad]

(Al- Manar, vol. VI , part 18, p. 717)

I t is im port ant t o not e t hat while he denounced Riba he accept ed t he

banks. This is a key m ot if of all post erior m odernist scholars. Wit h t his

j udgm ent he opened t he door t o t he accept ance of banking in I slam ic

Law. Alt hough he never for m ulat ed t he idea of an I slam ic Bank – he

did not see it as necessar y t o call it I slam ic – he est ablished t he basis

on which lat er m odernist scholars w ould const ruct t his far- fet ched

form ulat ion. The basis was re- int erpret ing int erest as a t ype of profit ,

such as in Shirkat or Qirad. This crit ical reint erpret at ion was achieved

by t he int roduct ion of a set of art ificial definit ions and decept ive

schem es.

Muham m ad Rashid Reda was t he founder of t he m agazine Al- Manar, which was dist ribut ed all around t he Muslim World. He part icipat ed in

t he sam e const it ut ionalist and ant i- Osm anli circles as Al- Afghani and

‘Abduh. He opposed t he t radit ional Madhhabs t o im pose his ow n

opinions. He also bit t erly opposed Sufism . His opinions on t he West

and Riba are clearly exposed in his writ ing:

“ There is not hing in our religion which is incom pat ible wit h t he current

civilisat ion, especially t hose aspect s regarded as useful by all civilised

nat ions, except wit h regard t o a few quest ions of usury [ Riba] and I

am ready t o sanct ion [ from t he point of view of t he Shari’ah]

everyt hing t hat t he experience of t he Europeans before us shows t o be

needed for t he progress of t he st at e in t erm s of t he t rue I slam . But I

m ust not confine m yself t o a school of law, only t he Qur'an and t he

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The expression “ except wit h regard t o a few quest ions of usury [ Riba] ”

m eant t hat , for exam ple, he saw not hing wrong w it h t aking up a life

insurance policy (Al- Manar, vol. XXVI I , p. 346, also vol. VI I , p. 384- 8, and vol. VI I I , p. 588) . He also decried t he t radit ional j urist s’ m isuse of

Qiyas t o ext end t o t he area of prohibit ion on t aking int erest on capit al

and suggest s t hat t he t aking of int er est on m onies left in t he bank or

post office does not com e under t he prohibit ed usury. (Al- Manar, vol. VI I , p. 28) .

Rashid Reda creat ed a new classificat ion of Riba t hat has becom e

param ount for all m odernist scholars ever since. Reda m ade a

dist inct ion in t he legal t r eat m ent of what he called t he “ Riba of t he

Qur’an” and t he “ Riba of t he Sunna” . Reda m aint ained t hat t he

prim ary form of Riba was t he one prohibit ed by t he Qur’an, and t hat

t his prohibit ion is t o be m aint ained at all t im es. The t ext s of t he Sunna,

on t he ot her hand, prohibit a light er or secondary t ype of Riba –

according t o him – w hich is generally prohibit ed but m ay be perm it t ed

in case of necessit y ( darurah) .

He essent ially deprived Riba an- nasiah of it s t rue m eaning and

reduced it t o som et hing else. First , he m aint ained t hat t he Riba

prohibit ed in t he Qur’an was t he Riba known as ‘Riba al- j ahiliyah’

( when a person did not pay his due aft er t he st ipulat ed t im e, t he seller

would increase t he price) which he wrongly equat ed wit h Riba

an-nasiah. Second, he incorrect ly assum ed t hat Riba an- nasiah r eferr ed

only t o loans, and also t hat it was only Haram when it involved

com pound int erest , and t herefore t hat single int erest was excluded

from t he prohibit ion. He t her efore concluded t hat sim ple int erest

charged or paid by banks was not prohibit ed by t he provisions of t he

Qur’an at all, nor by t he Sunna.

He also m aint ained t hat t he rem aining prohibit ion from t he Sunna

referred t o sales, in part icular t o bart er exchange. And he wrongly

assum ed t hat t he Riba of sales and bart er was Riba al- fadl. For

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gold m ust be equal in weight on bot h sides and t he t wo quant it ies

m ust change hands on t he spot , at once. He argued t hat unlike t he

Riba al- j ahiliyah, t his t ype was not known t o t he Arabs, since it was

difficult t o conceive of why t wo persons w ould exchange equal

quant it ies of t he sam e com m odit y at once. Here he showed his

“ perplexit y about equivalence” and consequent ly an ignorance of t he

full ext ent of t he issue of deferm ent . Thus he saw Riba al- fadl as being

part of t he abandoned pract ice of bart er when people would exchange

gold for gold ( and sim ilar) , yet – he argued – it is not pract iced any

m ore.

The fam ous hadit h of ‘hand t o hand’ and ‘equal for equal’ referring t o

Riba has not been underst ood by t he m odernist scholars. They could

not underst and t he relevance of t he argum ent and t he form in w hich it

is described. Gold for gold, equal for equal and hand t o hand, is a

descript ion of t he balance of t he t ransact ions. ‘Equal for equal’ refers

t o t he equivalence in t he quant it ies which refers by default in cert ain

t ransact ions t o Riba al- fadl; and ‘hand t o hand’ refer s t o t he

im m ediat eness of t he t ransact ion which refer s by default in cert ain

t ransact ions t o Riba an- nasiah. I t is a st at em ent which specifically

prohibit s t he possibilit y of exchanging ‘gold which is not present ’

( dayn) for ‘gold which is present ’ ( ‘ayn) . This is ver y relevant because

it is how Muslim s got cheat ed away from t heir gold – by exchanging it

for false prom ises of gold ( t he original form of paper m oney) . I t

follows t hat in or der t o m ake paper m oney Halal, t he m odernist

scholars had t o ignore t he relevance of t his hadit h and t his form ulat ion.

The aforem ent ioned hadit h refers specifically t o t he exchange of

Dinars and Dirham s of different denom inat ions, and im plies t he

im possibilit y of using prom ises of paym ent in t he exchange. Bot h

cases are r elevant and im port ant t o us.

I n conclusion, Reda’s view s w ere:

A] Riba an- nasiah was only Riba al- j ahiliyya. And only com pound

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B] Riba al- fadl was relat ive t o t he exchange. I t was secondary in

nat ure and it could be accept ed in case of necessit y ( darurah) .

This in t ur n produced t he following confusion:

1] Riba an- nasiah occurs in t he excess disparit y ( t afadul) t hat t akes

place in a t ransact ion in which t here is delay – such as loans.

2] Riba al- fadl occur s in t he excess disparit y ( t afadul) t hat occurs in a

t ransact ion in which t here in no delay.

According t o t his view bot h t ypes of Riba are creat ed by t he excess

disparit y ( t afadul) w hich we call Riba al- fadl. Ther efore, in fact , t hey

did not see, or did not want t o see, t he case of Riba creat ed by

deferm ent ( nasa’) , w hich w e call Riba an- nasiah.

4 .3 Th e follow e r s of Re da

The follow ers of Reda basically adopt ed t he sam e classificat ion but

differed wit h him on t he issue of com pound int erest . They agreed t hat

single int erest was also Haram , but t hey agreed t hat darurah can be

applied. And t hey saw Riba al- fadl as being secondary, relat ed t o what

t hey saw as bart er. Lat er m odernist scholars filled t he vacuum creat ed

by t heir definit ion of Riba al- fadl by referring t o m onopoly, m onopsony

and t he rigging of prices in t he m arket in general.

The t rut h is t hat bot h Riba an- nasiah and Riba al- fadl are prohibit ed by

t he Qur’an. I n fact t he Riba of t he Qur’an and t he Riba of t he Sunna

are exact ly t he sam e. The Sunna sim ply act s as a living com m ent ary

on t he Qur ’an.

Taking from t he basic classificat ion of Riba t he new pr o- banking

scholars init iat ed a whole process of I slam isat ion of capit alist

inst it ut ions st ar t ing wit h t he m ost im port ant one: t he bank. To

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t he use of paper m oney. The disguising of int erest was done t hrough

several m echanism s, t he m ost im port ant of which w as t he re- definit ion

of Murabaha as a financial cont ract . The accept ance of prom issor y

not es was done t hrough a careful redefinit ion of Riba which basically

replaced t he m eaning Riba an- nasiah wit h a new definit ion. How was it

done?

4 .4 Th e m isu n de r st a n din g of Riba a n - n a sia h t oda y

Modern pro- banking ‘ulem a have inherit ed t he sam e ‘perplexit y about

equivalence’ t hat has haunt ed econom ist s since Bent ham . They could

not underst and t he m eaning of ‘gold for gold, equal for equal, hand t o

hand’. They were m isled t o subst it ut e t he m eaning of t he sent ence

wit h a sim pler underst anding of int erest . I n t he process t hey ignored

t wo t hings: one, t he com prehensive m eaning of ‘equal for equal’ which

goes beyond int erest ; t wo, t hey com plet ely ignored t he issue of

deferm ent .

Their m ist akes are basically t he sam e as Reda’s. The first m ist ake is t o

ident ify Riba wit h int erest . They say t hat Riba and int erest are t he

sam e t hing and can be used int erchangeably. The second m ist ake is in

t he classificat ion of Riba which produces an inadequat e underst anding

of Riba an- nasiah.

Am ong t hese m odernist ‘ulem a, som e have com e up wit h an

alt oget her new classificat ion:

The Riba of loans and t he Riba of sales. These t wo are called ‘Riba

al-duyun’ and ‘Riba al- buyu’. Riba al- duyun refers t o cont ract s in which

t here is delay, such as loans and delayed sales. Riba al- buyu refers t o

cont ract s in which t here is no delay, such as norm al sales and

exchange. Under t his classificat ion t hey insist in calling applying Riba

(29)

an- nasiah wit h Riba al- j ahiliyya and w it h t he increase in loans. This is

exact ly t he sam e as t he classificat ion of Reda, except t hey are now

using new t erm s.

These m odernist s m ist ranslat e t he Ayat ( 2: 275) saying t hat it m eans

“ God has forbidden int erest ” . And t hey com plet e t heir

m isunderst anding by endorsing lit erally t he hadit h t hat says “ There is

no Riba except in nasiah.” According t o us t his hadit h does not exclude

t he ot her form s of usury.

According t o t hem t he prohibit ion of Riba an- nasiah essent ially im plies

t hat t he Shari’ah does not per m it int er est . For t hem , t he point in

quest ion is “ t he predet erm ined posit ive ret urn” ( Chapra 1985, Towards

a Just Monet ary Syst em . Leicest er: The I slam ic Foundat ion. p. 57) .

The prohibit ion of “ predet erm ined posit ive ret urn” – along w it h

“ int erest - free” – is anot her key aspect of t heir t hesis, yet it cannot

subst it ut e t he t rue m eaning of Riba.

What is im port ant about t his issue is t hat t hey equat e Riba an- nasiah

wit h t he loan, and it is rem oved from any m eaning in t he exchange

and ot her cont ract s. We will see lat er t he im plicat ions of t his.

They adm it t hat t here is a Riba al- fadl but t hey have also changed it s

m eaning. They say t hat Riba al- fadl is encount ered in hand- t o- hand

purchases and sales of com m odit ies. I t cover s all spot t ransact ions

involving cash paym ent on t he one hand and im m ediat e delivery of t he

com m odit y on t he ot her. This leaves t hem com plet ely puzzled as t o

t he m eaning of deferm ent in t he exchange. They ignore t he fact t hat

unj ust ified disparit y ( t afadul) w hen occurr ing in a loan is Riba al- fadl

as well. This vacuum is filled wit h t heir ow n definit ion of Riba

an-nasiah, which allow s t hem t o r em ove it fr om it s t rue m eaning. To give

a sem blance of validit y t o t heir m ist aken posit ion, t hey quot e all t he

aut horit ies and t he hadit h but t hey change t he cont ext and t w ist t he

m eaning of what t ype of Riba is applicable, t hus der ailing t he

(30)

For exam ple, t hey argue t hat from t he pr ohibit ion of Riba al- fadl arises

t he saying of t he Prophet , sallallahu alayhi wa sallam , requiring t hat if

gold, silver, wheat , barley, dat es and salt are exchanged against

t hem selves t hey should be exchanged on t he spot and be equal and

alike. Alt hough t hey adm it t hat t he m ent ioned six it em s perform ed t he

funct ion of m oney at t hat t im e, t hey do not draw any parallel wit h t he

issue of m oney exchange. They say paper m oney is not part of t he

prohibit ion because it is not one of t he it em s m ent ioned in t he hadit h.

This is irr elevant because prom issor y not es eit her have a value as ‘ayn

or dayn. I f it is ‘ayn t heir value is zero. I f it is dayn, t hen t hey

represent a deferred paym ent which is not perm issible in t he exchange.

While explaining t he significance of Riba al- fadl and why it has also

been prohibit ed, Chapra provides t he following argum ent s: On t he

surface it appears hard t o underst and why anyone would want t o

exchange a given quant it y of gold or silver or any ot her com m odit y

against it s own count erpart , and t hat t oo ‘spot ’. He says t hat w hat is

essent ially being required is j ust ice and fair play in spot t ransact ions;

t he price and t he count er- value should be j ust in all t ransact ions

where cash paym ent ( irrespect ive of what const it ut es m oney) is m ade

by one part y and t he com m odit y or ser vice is delivered recipr ocally by

t he ot her. He says t hat any t hing t hat is received as “ ext ra” by one of

t he t wo part ies t o t he t ransact ion is Riba al- fadl, w hich could be

defined in t he words of I bn al- Arabi as all excess over what is j ust ified

by t he count er- value. Therefore he argues t hat j ust ice can be rendered

only if t he t wo scales of t he balance carry t he sam e value of goods.

And finally he concludes t hat t his point was explained in a befit t ing

m anner by t he Prophet , sallallahu alayhi wa sallam , when he referred

t o six im port ant com m odit ies and em phasised t hat if one scale has one

of t hese com m odit ies, t he ot her scale also m ust have t he sam e

com m odit y, “ like for like and equal for equal” . He furt her cont inues t o

argue t hat t o ensure j ust ice, t he Prophet , sallallahu alayhi wa sallam ,

even discouraged bart er t ransact ions and asked t hat a com m odit y for

(31)

t he needed com m odit y. This is because it is not possible in a bart er

t ransact ion, except for an expert , t o accurat ely det erm ine t he fair

equivalent of one com m odit y in t erm s of all ot her goods. Hence, t he

equivalent s m ay be est ablished only approxim at ely t hus leading t o

som e inj ust ice t o one part y or t he ot her. The use of m oney t herefore

helps reduce t he possibilit y of an unfair exchange ( I bid, pp. 58- 59) .

This posit ion elim inat es t he possibilit y of nasiah being part of t he

exchange. He sim ply says t hat such t r ansact ions of gold for gold do

not occur any m ore and t herefore t he issue is ir relevant . The r ealit y is

t hat t hey occur every day – every t im e a prom issory not e is used.

They only consider t hat what is forbidden is t he int erest in t he loan

and t he excess in t he exchange of t he sam e genus. Everyt hing else is

ignored.

Following from t he pr evious argum ent Chapra furt her concludes t hat

all com m odit ies exchanged in t he m arket would be subj ect t o t he

possibilit y of Riba al- fadl. He says t hat it s prohibit ion is t hus int ended

t o ensure j ust ice and elim inat e all form s of exploit at ion t hrough ‘unfair’

exchanges and t o close all back doors t o Riba since, in t he I slam ic

Shari’ah, anyt hing t hat serves as a m eans t o t he unlawful is also

unlawful. He argues t hat t he Prophet , sallallahu alayhi wa sallam , also

equat ed wit h Riba t he cheat ing of an unsophist icat ed ent rant int o t he

m arket and t he rigging of prices in an auct ion w it h t he help of agent s.

Thus, he says, t he ext ra m oney earned t hrough such exploit at ion and

decept ion is not hing but Riba al- fadl. Riba al- fadl, deprived of any

ot her m eaning, becom es accor ding t o him any form of inj ust ice, and

he cem ent s his case wit h t he hadit h of t he Pr ophet , sallallahu alayhi

wa sallam , who said: “ Leave what creat es doubt in your m ind in favour

of what does not creat e doubt .” And also Khalif Um ar who said:

“ Abst ain not only from Riba but also from Riba h” t he lat t er lit erally m eaning ‘doubt ’ which refers t o incom e t hat has t he sem blance of Riba

or which r aises doubt in t he m ind about it s r ight fulness. I t covers all

(32)

Thus Riba al- fadl is com plet ely redefined in t erm s of inj ust ice and Riba

an- nasiah is pushed aside as m erely concer ning loans, where in fact it

does not fit except in t he cases in which “ debt for debt ” is applicable,

t hat is, except in t he case of repaying a debt wit h a debt .

Referring t o Fakhruddin al- Razi, Chapra concludes t hat Riba an- nasiah

and Riba al- fadl are bot h essent ial com ponent s of t he verse “ God has

allowed t rade and prohibit ed Riba.” And he says t hat while Riba

an-nasiah relat es t o loans and is pr ohibit ed in t he second par t of t he verse,

Riba al- fadl relat es t o t rade and is im plied in t he fir st part . He says

t hat inj ust ice inflict ed t hrough Riba m ay be perpet uat ed t hrough

business t r ansact ions, and Riba al- fadl r efers t o all such inj ust ices or

exploit at ion. I t requires absence of rigging, uncert aint y, or speculat ion,

and m onopoly and m onopsony ( I bid, p.61) .

Now, if we exam ine t his sent ence “ Riba an- nasiah r elat es t o loans” we

can underst and t he nat ure of t heir m ist ake. What Chapra and ot hers

say is t hat nasiah refers t o t he Riba t hat occur s in t r ansact ions t hat

have delay ( such as a loan) , while t he proper posit ion is t hat Riba

an-nasiah is t he “ unj ust ified deferm ent ” t hat occur s in any t ype of

t ransact ions ( it could occur in an exchange, for exam ple) . I n fact ,

alt hough t here is deferm ent in a loan, it does not const it ut e an

unj ust ified deferm ent . Deferm ent in a loan is Halal ( except in t he case

“ debt for debt ” ) . The cause of “ unj ust ified excess” in a loan is disparit y.

Therefore, deferm ent is not t he cause of Riba in t he case of a loan,

rat her disparit y is a cause of Riba. I t follows t hat t he t ype of Riba

which is associat ed wit h t he char ging of int erest in t he loan is Riba

al-fadl and not Riba an- nasiah.

This m ist ake is not j ust a sim ple m ist ake, it car ries im port ant

consequences. By redefining Riba an- nasiah, it loses it s m eaning. I t

loses it s abilit y t o define t he Haram which is inherent in unj ust ified

deferm ent . This will prevent I slam ic Bankers from being able t o

(33)

ot her t ransact ions in which t he use of dayn is unlaw ful. I t follows t hat

t his m ist ake is a back- door j ust ificat ion of paper m oney.

I slam ic Bankers agree t hat int erest charged by com m ercial banks “ is

ident ical w it h t he excess st ipulat ed as an obligat or y condit ion in t he

cont ract , which is one of t he t wo t ypes of usury prohibit ed by I slam ic

Shari’ah.” But t hey ignore any quest ion about t he possibilit y of Riba by

deferm ent in t he exchange and ot her t ransact ions, so cr it ical t o

underst anding paper m oney. The I slam ic Fiqh Academ y est ablished by

t he Organizat ion of t he I slam ic Conference ( OI C) in it s second session

held in Jeddah, Saudi Arabia, 22- 28 Decem ber 1985, declared t hat

“ any increase or profit on a loan which has m at ured, in r et urn for an

ext ension of t he m at urit y dat e, in case t he borrower is unable t o pay,

and any increase or profit on t he loan at t he incept ion of t he loan

agreem ent , are bot h form s of usury ( Riba) , which is prohibit ed under

t he Shari’ah” ( Ausaf Ahm ed 1995, The Evolut ion of I slam ic Banking. I n Encyclopaedia of I slam ic Banking, London: I nst it ut e of I slam ic Banking

and I nsurance. p.17) .

I n conclusion, t he m odernist classificat ion reduces Riba t o t wo issues:

int erest in loans and any for m of m onopoly or m onopsony, or rigging

t he pr ices in t he m ar ket . The first t hey arbit rarily call Riba an- nasiah,

and t he second Riba al- fadl. This classificat ion t w ist s t he m eaning of

t he t wo t ypes of Riba and it ignores t he vit al issue of t he use of paper

m oney in t he exchange and by ext ension t he whole m at t er of paper

m oney. I n essence, t heir idea of Riba is int erest on a loan.

4 .5 Equ a t in g Riba t o in t e r e st in a loa n

Pro- banking scholars equat e int erest wit h Riba. According t o t hem ,

Riba refers t o t he prem ium t hat m ust be paid by t he borrower t o t he

lender along wit h t he principal am ount as a condit ion for t he loan or

(34)

Riba is t he predet erm ined ret urn on t he use of m oney. I n t he past

t here has been disput e about w het her Riba refers t o int erest or usury,

but t here is now consensus am ong m odernist scholar s t hat t he t erm

covers all form s of int erest and not only “ excessive” int erest [ as

previously believed by Reda and ot hers] ( Khan, W. M. ( 1985) ,

Tow ards an I nt erest - Free I slam ic Econom ic Syst em. Leicest er, I slam abad: The I slam ic Foundat ion, The I nt ernat ional Associat ion of

I slam ic Econom ics. p.52) .

Modernist scholars have concluded t hat t he m ost im port ant

charact erist ic of Riba is t hat it is t he posit ive and definit e result of

m oney when changed. I n ot her words, when m oney beget s m oney,

wit hout being exchanged for goods or services, it is called Riba. I t s

basic char act er ist ics, according t o t hem , are:

1. I t m ust be relat ed t o loan;

2. A predet er m ined am ount of m oney is t o be paid when due;

3. A t im e is fixed for t he repaym ent ; and

4. All t hese elem ent s for repaym ent are t aken as condit ions for loan.

I n t his reduct ionist view t he whole issue of deferm ent is ignored.

4 .6 I sla m ic Ba n k in g

4 .6 .1 I sla m ic Ba n k s a r e ba n k s

The ult im at e result of t his deviat ionist view of Riba is t he j ust ificat ion

of banking. Their prem ises are t hat ‘banking wit hout int er est ’ is Halal.

I n fact , alt hough I slam ic Banking defines it self as non- int erest banking,

(35)

profit , som et im es dividends, som et im es m ark- up t hrough various

decept ive schem es. But apart from t hose decept ive m et hods of hiding

int erest , t he m ain pr oblem rem ains t hat t he I slam ic Bank I S a bank.

I slam ic Banks, like all banks, pr act ice ‘fract ional reserve banking’.

Fract ional reserve banking is t he essence of fiat m oney. Through t his

m et hod t hey use and creat e fiat m oney and consequent ly t hey

endorse t he current syst em of paper m oney.

First ly, in I slam , t he person ( in our case, t he banker) who receives a

deposit ( w adi’a) from anot her is not ent it led t o t rade wit h it . This is

considered a t r ansgression of t he cont ract . I n t he past Muslim s dealt

wit h paym ent s direct ly on t heir own or t hr ough a com plex net work of

wakils, who did not creat e credit , t hey only execut ed t he orders of

t heir cust om ers, i.e. t o m ake a paym ent or receive a paym ent . Money

and credit were not m ixed. And t he wakils did not use t he m oney in

deposit for t heir own t rading.

Secondly, in I slam you cannot use debt s as m oney. I n t he case of

paper m oney which is not backed by specie ( it is no longer a debt ,

alt hough it used t o be) , t he banker is t rading w it h r eceipt s whose

value is due t o t he legal com pulsion of t he St at e. The present paper

m oney is in fact a t ax. There is no way of allow ing t his in I slam . Not

only do t he I slam ic Bankers t rade wit h paper m oney, t hey cont ribut e

t o t he creat ion of m or e paper m oney t hrough t he cr eat ion of deposit s.

I t m ust be not iced t hat a bank deposit funct ions j ust like m oney.

To illust rat e t his point of t he creat ion of m oney, we will give an

exam ple. I n Canada t he figures published by t he Bank of Canada

explain t hat by 1998 t he rat io of all Canadian bank cash reserves

( $3.893 billion) t o t heir t ot al asset s ( $1393 billion) had j um ped t o a

level of 1: 358, a num ber which is unheard of considering t hat

hist orically, during t he first 50 years of t he 20t h cent ury, t he rat io

never exceeded 1: 15. That m eans for ever y dollar of cash in t heir

vault s or deposit ed w it h t he Bank of Canada, t he banks have conj ured

(36)

This exam ple show s t hat t he banks are act ually t he m ain cont ribut ors

in t he m oney supply of t he nat ion.

What fract ional r eser ve banking allow s is for t he bank t o lend m ore in

t he form of deposit s t han what it holds in t he form of cash. So what

happens if everyone begins t o feel nervous about t he current syst em

of fract ional reserve banking, and grow ing num bers of people

wit hdraw savings held in a bank? There is not enough cash. A bank

run occur s, as w it nessed by t he t ragic event s of t he Great Depression

in t he 1930s. For m ore recent event s consider 1985, when num erous

regional banks in t he nort h- east ern Unit ed St at es faced bankrupt cy

due t o a run on credit when individuals dem anded a call on deposit s.

We also wit nessed a bank run j ust recent ly in Argent ina, in 2001. The

police w er e called, and cust om ers w ere r efused ent ry int o com m er cial

banks t o w it hdraw savings. Elect ed officials and governm ent s in

various count ries have gone so far as t o force t he closure of banks, t o

prevent a bank run from happening and causing a chain of event s

which could becom e uncont rollable and essent ially dest roy t he current

banking syst em .

The solut ion put in place once a bank has been closed is t o use

everyone’s t ax m oney t hrough cent ral banking insurance t o elim inat e

t he problem unt il it occurs again.

St at es, by ‘prot ect ing’ banks from bank runs by m eans of deposit

insurance, ult im at ely com pound t he problem by fract ionat ing furt her

t he cent ral bank reserves on which t he banks draw from t o begin wit h.

The current banking indust ry is regulat ed in such a m anner t hat a

legit im at e cart el of m oney- m akers has been creat ed. The St at e

prot ect s t his banking cart el from t he norm al rat ionale and logic of t he

cont ract ual law.

I slam ic Banks are no except ion t o t his syst em . They are part of it .

They pract ice fract ional reserve banking w hich is t he basis on w hich

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