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