Issues in Interest as Riba an-Nasiya[edit]
Opposing sides
Most Muslims and most "non-Muslim observers of the Islamic world" believe that interest on loans (also on bonds, bank deposits etc.) is forbidden by Islam.[199] (Such loans — or banks that make them — are sometimes referred to as ribawi, i.e. carrying riba.)[200][201][202]This "orthodox" position [Note 32] is fortified by "voluminous and overwhelming" scholarly literature.[204] Among the Islamic bodies that have declared all interest to be riba include the First International Conference on Islamic Economics (1976),[79][84] the Fiqh Academy of the Organisation of Islamic Cooperation (1986), the Research Council of al-Azhar University (1965), the Federal Shariah Court of Pakistan in a 1991 judgement.[84] Scholars and authors who have declaring that there is a religious consensus (ijma) on the subject include Abul A'la Maududi (1903–79), Yusuf al-Qaradawi, Wahbah al-Zuhayli, Tariq Talib al-Anjari, Thanvir Ahmed, Mabid al-Jarhi, M.N. Siddiqi, Munawar Iqbal and Imran Ahsan Khan Nyazee.[204] In the discipline of Islamic economics, a prohibition of interest on loans in the name of prohibiting riba has been called that field's "most salient objective".[205]
Its importance among Islamists/revivalist Muslims is reflected in the size of the Islamic financial industry built on the basis of the orthodox position (approximately $2 trillion as of 2017),[206] and in expressions such as the uproar that temporarily shutdown the Pakistan parliament in 2004 when a Member of Parliament (MP) had the temerity to quote an Egyptian Islamic scholar decreeing that bank interest was not un-Islamic. (In response — after the parliament was reopened — an Islamist MP stated that no member of parliament had the right to question this "settled issue" since the Pakistan state Council of Islamic Ideology had decreed that interest in all its forms was haram in an Islamic society.)[Note 33]
Among some (such as Imran Nazar Hosein) interest on loans constitutes not just a sin or crime but the
However, not all Muslims agree with the "orthodox" formulation that any and all interest — including contemporary "bank interest" (as opposed to interest charged in predatory, unfair or abusive lending) — constitutes riba.[209][Note 34][211] Skepticism of the interest=riba formulation (forming a so-called "non-orthodox" or "Non-Equivalence School")[212] goes back to Ottoman Grand Mufti Ebussuud Efendiand includes 20th century Modernist jurists, such as Muhammad Abduh, Rashid Rida, Mahmud Shaltut, Syed Ahmad Khan, Fazl al-Rahman, Muhammad Sayyid Tantawy.[213] The "thin ranks"[214] of notable contemporary non-orthodox scholars[212] include Fathi Osman, Nawab Haider Naqvi, Salim Rashid, Imad al-Din Ahmed, Omar Afzal, Raquibuzzaman, Abdulaziz Sachedina, Abdullah Saeed, Mahmud El-Gamal and Mohammad Fadel.[215]
While the minority status of non-orthodox scholars is uncontested, whether there is a consensus (ijma) in favor of orthodoxy, is. One non-orthodox economist (M.A. Khan) argues that a true consensus requires the agreement of not only most Islamic scholars but the Muslim community as a whole.[Note 35] Since most Muslims have failed to choose interest-free Islamic banking for most of their assets, this demonstrates (according to Khan) that they do not agree that all interest is riba.[217] [Note 36]
Overview of rationale and its critics
In answer to the question, "why has God prohibited interest?", a number of arguments have been advanced by orthodox/Islamist/revivalist scholars, preachers, writers and economists.[227] They include that (in their view)
- interest is a form of exploitation by the lender of the borrower and/or by the rich of the poor, that brings more inequality in society;
- interest should not exist because money is unproductive and charging a price for it is unfair;
- it is unjust for a lender to receive a fixed return (i.e. interest) when the profits or losses of the borrower/entrepreneur vary, and/or to gain from financial activity without risk of potential loss;[228]
- interest is unnecessary in a contemporary economy because investment capital can be generated justly by the sharing of risks and profits between financiers and entrepreneurs (and when that is impractical other financing of commodity and product purchases); this Islamic system of banking and finance will lead to greater prosperity and more human sympathy, economic stability, efficiency, development, etc.[229][230]
At the same time that orthodox analysts offer rationale for why interest is forbidden, "more than one analyst" — including medieval Quranic exegete Fakhr al-Din al-Razi [231] and leading orthodox scholar Taqi Usmani — have stressed that ultimately, Muslims must obey the prohibition even if they do not understand the reason for it.[231] Usmani writes:
In any case, Usmani writes, injustice (zulm) "is a relative and rather ambiguous term the exact definition of which is very difficult to ascertain".[185]
- Criticism of rationale
Critics of the orthodox position — primarily Timur Kuran, Mohammad Omar Farooq, Muhammad Ahram Khan and Feisal Khan — generally argue that not only has God/Islam not forbidden bank interest, but that interest does not harm economic prosperity, the poor, or society in general. Some of their contentions are
- that bank interest is not riba,
- the definition of which should be based on the unjust/exploitive lending practices of the Makkan society where the Quran was revealed,[237]
- and which is far removed from the much more benign bank lending of contemporary society where most lending is for commercial purposes to large, sophisticated borrowers paying competitive, regulated interest rates;[238][239][240]
- that the arguments advanced for why interest is unjust, exploitative and forbidden, do not "hold up",
- that attempts to replace interest with an Islamic banking system based on profit and risk sharing have not been successful,
- thanks to practical problems such as dealing with inflation, the time value of money, "information asymmetry", additional costs; which have led
- profit and loss sharing itself to become a minor player,[245]
- while the backbone of the system (debt-like instruments[Note 38] such as murabaha) have used hiyal (legal stratagem) to get around religious requirements[247][248][249] until they resemble conventional banking[250] in most everything besides the terminology they use;[251]
- and that promises made for this system — such as that it would fund long-term economic development[252] and help low-income small traders[253] — have not been fulfilled;
- and that ultimately the campaign against bank interest can best be explained not by scriptural-based argument, but by a need to create a complete and separate Islamic realm —
with its own financial sector — by which Muslims can strengthen their identity and avoid lapsing into being "partial Muslims".[254]
Injustice of fixed return
The (alleged) injustice of fixed return and its (alleged) lack of risk, has been attacked by Ismail Ozsoy, M.N. Siddiqi, and M. Hameedullah. Ismail Ozsoy defines interest as riba and as "an unearned or unequally distributed income." He argues that both those who pay and receive interest are sinful and behaving unjustly because the interest rate is "fixed at the very beginning, but it is impossible to predict the outcome of the business at which the loan is used, profit or loss, or how much either would be." Ozsoy states that his argument is supported by Quran 2:275-280.[255]
Mohammad Nejatullah Siddiqi argues that charging interest on loans — whether intended for consumption or production — is forbidden exploitation. If a loan is to buy consumer goods, those who have wealth should assist those without and not charge any increment above principal. If a business borrows to invest in plant or equipment, a guaranteed return on capital is unjust because there is no sharing of profits between entrepreneur and financier,[256] the borrower is "obliged to pay to the bank an extra amount" — i.e. interest.[257]
M. Hameedullah and M. Ayub also argues that interest is unjust because the borrower of collateralized loans bears risk but (they believe) the lender does not,[258][259] since the lenders can keep collateral if the borrower defaults,[260] which (they believe) violates the Islamic principle that reward should require taking/being liable for risks.
Abul A'la Maududi also believed return on a investment other than profit sharing is unjust.[261] He preached that the interest-charging lender will increase interest rates "in direct proportion" to the borrower's "misery and the extent of his need, ... if the child of a starving man is dying of illness, the money-lender will not deem an interest rate of 400 or 500% as unduly harsh.” [262]
Defending the justice of a "fixed" return,[263] M.O. Farooq asks if lenders aren't "renting out" the purchasing power of their capital for the length of the loan and due interest as a form of rent[264] much as any landlord, rental agency, or other temporary provider of something valuable/useful. M.A. Khan asks why fixed rent and fixed wages are not equally unjust[265] despite not being forbidden by orthodox scholars. (While some Islamist thinkers have promoted the idea that 'labor owned firms would express the spirit of Islam better' than conventional ones,[Note 39] there is no movement to restrict businesses to profit-sharing payment for employees or even much debate on the issue.)[265] Farooq notes that in the modern world banks compete with other lenders and subject to government regulation. Predatory lending does exist — from payday lenders, and those lending at high and variable rates. These "may be covered by riba and thus Islamically prohibited,"[268] but this is hardly the same as declaring all interest riba.
Another argument against the idea that charging interest on loans exploits entrepreneurs, is that availability of capital for a modern business endeavour is one factor among many that lead to success or failure. The entrepreneur/business management involves in multiple elements — product design, production, marketing, sales, distribution, employee management and motivation, etc. Having provided its share in the process, why should financiers suffer part of the losses (if there are any) that are beyond their control; or be rewarded with profits (if there are any) that they had so little to do with?[269] In answer to the idea that collecting interest on a business loan when the business has gone insolvent is unjust, M.A. Khan replies that in the overwhelming majority of cases both banks and lenders benefit from loans and asks if it is sensible to let the small fraction of bankruptcies dictate how finance is structured.[270]
Feisal Khan points out that contrary to the orthodox view that collateralized loans are risk free, the 2008 subprime mortgage crisis has shown that "even AAA-rated collateral is often insufficient to ward off lender losses".[271]
M.A. Khan cites rates of profits of business enterprises from developed countries[272] over several decades, which were "consistently" higher by "several multiples" then the rates of interest,[Note 40] a reflection of capital markets compensating the greater risk of equities with greater returns (on average), and safer fixed income investment with lower returns.[274] Fixed income accounts also provide a service for those with fixed and modest income,[252] critics argue, and for people who need ready access to cash (that less liquid profit-making investments can't provide) but want to "put their money to work". Large, sophisticated enterprises can hardly be considered victims of exploitation when they borrow funds that originate in accounts of small savers.[275]
Concerning the motive of fighting injustice and exploitation, M.A. Khan complains that the orthodox have never bothered to define exactly what they mean by exploitation or done the research to substantiate their claim that all interest exploits.[242] M.O. Farooq notes that orthodox supporters frequently invoke exploitation and injustice in their polemical arguments but ignore it in studies or in depth works.[Note 41] Farooq and others (e.g. Izzud-Din Pal and Yoginder Sikand) complain that the pursuit of justice has not been made the "underlying reason" in defining riba by jurists. (See above.)
Vice and corruption
Among those arguing that interest has a corrupting influence on society are Muhammad N. Siddiqi,[279] Yusuf al-Qaradawi, medieval jurist Fakhr al-Din al-Razi, and Islamist leader Abul A'la Maududi.
Interest "corrupts" society and "demeans and diminishes human personality" according to M.N. Siddiqi.[280] Those who earn income from interest will not have to work, leading to the interest drawers' contempt for work and depriving others of the benefits of the interest drawers' industry and efforts, according to Yusuf al-Qaradawi.[281] Interest brings an end of "mutual sympathy, human goodliness, and obligation", according to Imam Fakhr al-Din al Razi.[231]
Maududi holds that interest "develops miserliness, selfishness, callousness, inhumanity".[282] Ibn Rushd argued the rationale for prohibition relates to the possibilities of cheating that exists in riba, which is clearly visible in riba fadl.[283][page needed]
Non-Orthodox M.O. Farooq replies by asking why Siddiqi does not even attempt to provide evidence for how charging interest leads to social and personal corruption, noting there is no connection between levels of corruption as determined by monitors such as Transparency International and the use of interest-bearing loans.[284] Farooq answers the charge that interest leads to sloth by stating that matching the savings of savers/depositors with the capital needs of borrowers is a economically useful and competitive function, and that in the present day many savers are retired elderly of modest means for whom it would be foolish to take risks with their life savings,[285] and who pay for this caution with smaller returns. Another non-orthodox critic, Faisal Khan, argues that while complaints of lenders being wealthy and predatory may well have been valid in the 12th Century of al-Razi, or among the North Indian peasantry that Maududi knew (who borrowed from the bania Hindu merchants who sometimes serve as money lenders), it "is hardly an accurate description" of the effects of a "modern conventional banking/financial system".[286]
Taqi Usmani, maintains that investors/savers desire for fixed income investments/accounts is the result of an unnatural expectation of no risk of loss, brought about by the separation of finance "from normal trade activities" in capitalist banking — normal trade activities of course resulting in losses from time to time. Once people understand this they will invest in Islamic finance.[287]
Inequality[edit]
Among those who believe that interest bearing loans favor the rich and exploit the poor are M.U. Chapra, Taqi Usmani, Al-Qaradawi, Abul A'la Maududi, Taji al-Din and Monzer Kahf,[112] Fakhr al-Din al-Razi, and Ghulam Ahmed Pervez.[Note 42] Many (such as Taji al-Din, Fakhr al-Din al-Razi and Al-Qaradawi),[281][290] express concern over rich lenders exploiting or refusing to lend to poorer borrowers following the traditional orthodox theme of a "vicious rentier class that thrives on the misery of the poor" perpetuating "a system designed to enrich the few at the expense of the many.[Note 43] However Taqi Usmani expresses concern about rich borrowers who borrow "huge" amounts for "their huge profitable projects" and exploit lenders by only paying interest and not sharing their profits.[292] (Elsewhere he states that "the intrinsic nature" of interest and not the "financial position of the parties" make loans charging interest invalid.)[293]
Taji al-Din and Monzer Kahf argues that charging interest on loans restricts the circulation of wealth to those who already have it, since lenders do not provide loans to those who are unable to repay them. This (he believes) is forbidden by the Quran and results in an increase the divide between the rich and poor.[294] Chapra notes that since banks are primarily interested in collateral to secure loans rather than the profitability of what the borrower/entrepreneur is seeking capital for, banks will finance rich borrowers with collateral rather than small borrowers with good ideas.[295] Abul A'la Maududi calls interest "the greatest instrument by ... which the capitalist tries to concentrate in his hands the economic resources of the community",[296] proclaiming "there is hardly a country in the world in which money-lenders and banks are not sucking the blood of poor labouring classes, farmers and low-income groups".[297]
M.A. Khan replies that these difficulties would not be solved by Islamic banking, firstly because "no business firm will extend credit to a customer until it is satisfied with its credibility",[298] and secondly because there is no evidence that Islamic banking institutions have been focusing on the potential profitability of the proposals of entrepreneurs seeking capital rather than collateral.[Note 44] Overall, Khan writes, there is simply "no significant and rigorously argued study, of either Muslim or non-Muslim countries, showing that interest is causing or contributing to inequalities of income and wealth."[300]
General economic harm
Among the claims that interest plays a negative role in the economy include that it squeezes out productive investment, encourages speculation, creates credit bubbles, fuels inflation, instability, unemployment, depressions and imperialism.
Umer Chapra writes that by providing "easy access to credit for unproductive purposes", interest "squeezes the availability of resources for need fulfilment",[301][302] squelching job creation.[303][304] Maududi states that productive investment is withheld when enterprise seeking investment cannot yield a profit equal to the "prevailing rate of interest".[305]
Mohammad Abdul Mannan writes that eliminating interest would follow the cooperative norm of the Quran, and stimulate job creation and economic vitality.[306]
M.A. Khan replies that the harm created by interest cannot be that severe as interest-based finance is "deeply entrenched" in the developed countries of the OECD, where per capita income is quite high and the percentage of poor people relatively low.[307] M.O. Farooq notes that the countries that have gone in an "'interest-free' direction" are "hardly examples of greater economic stability."[308]
On the issue of over-indebtedness and instability, Chapra also argues that the interest-based system and its reliance on collateral leads to excessive levels of debt, which leads to economic instability.[302] Islamic finance would mean greater financial discipline than debt-based financing because it is tied to real assets. This discipline would mean greater economic stability.[309][310] Mirakhor and Krichene[311] argue that interest charges on debts lead to the creation of a secondary market for debt. This leads to debt changing hands, multiple layers of it being created, and the generation of credit bubbles whose inevitable bursting destabilizes the economy.[309][311] M.T. Usmani insists interest-based financing may "fuel inflation" since it "does not necessarily" finance the creation of real assets" (its financing not tied to real assets), and may increase the supply of money without increasing products to match it.[312] He cites a number of non-Muslim economists criticizing capitalist financial system for its propensity towards financial speculation, over-indebtedness, misallocation of lending capital.[313] (Although their solutions its problems do not include banning all interest on loans.) Another way in which interest is alleged to "lend itself to speculation" is the (alleged) practice of borrowing at low rates to lend at higher ones. This (allegedly) disrupts "trade cycles" and interferes with economic planning and would be remedied by banning interest charges.[314] Chapra also argues that "the erratic behaviour of interest rates" has caused "three decades" of "turbulence in the financial markets", citing a Nobel Laureate in economics, Milton Friedman.[315]
Islamist leader Abul A'la Maududi — who was not an economist but has been credited with laying "down the foundations for development "of Islamic economics[316] — preaches that interest (along with the lack of zakat tax on savings) prevents economic progress and prosperity by rewarding savings and capital formation (the common idea that these things help economic development being a "deception").[317] When people are not in "the habit of spending all the wealth they earn"[317] they consume less, which decreases employment, which leads to still less consumption, creating a downward spiral[317] leading finally "to the destruction of the whole society as every learned economist knows."[318]
Entrepreneurial profit and wages should be the only source of income in society. Siddiqi and Ganameh cite a hadith of "income devolved on liability" in this context.[319]
In reply, M.A. Khan argues
- that the effective elimination of interest on loans for an extended period in the world's third largest economy (i.e. Japan, which lowered prime rates to 0.01% from about 2001 to 2006 in an attempt to stimulate its economy) failed to bring that country economic stability or prosperity;[320]
- that a secondary market for financial instruments (which "unties" finance from real assets) "is a real, live need" of finance, even if it may pose a risk of speculation. The "alternative instruments of finance such as sukuk and other Islamic bonds would also require a secondary market." And in fact there have been "efforts to create" these markets for Islamic financial instruments, but the need to follow the ideology of contemporary Islamic finance means that the markets "have ended up in a host of ruses, compromises and stratagems".[309]
While Khan admits that a banking system based on the two modes of (1) current account deposits backed by 100% reserve and (2) profit and loss sharing accounts, would doubtless be more stable than conventional banking,[321] this "has limited practical application" — limited to that small niche of Islamic banking that actually uses profit and loss sharing.[322]
In reply to Chapra's citing of Western economist Milton Friedman, M.O. Farooq notes that the monetarist economists such as Friedman blame interventionist monetary policy in general rather than interest charges for the instability, and when asked specifically about any economic danger from interest charges Friedman himself stated that the work Chapra quoted did "not provide any support whatsoever for the zero interest doctrine" and that he (Friedman) did "not believe there is any merit to the argument that an interest-free economy might contribute toward greater economic stability. I believe indeed it would have the opposite effect."[323]
Accumulation of third world debt
Usmani and other orthodox believe that the burden of foreign debt incurred by developing countries (including many Muslim countries) from loans by developed countries and institutions like the IMF, is an illustration of the curse of interest.[324] Usmani quotes a number of non-Muslim sources,[Note 45] stating that this debt service exceeds "resource flows to developing countries", and is still growing, has brought "structural adjustment" and "austerity programs", leading to "massive unemployment, falling real incomes, pernicious inflation, increased imports, ... denial of basic needs, severe hardship and deindustrialization", etc.,[325] and can be compared to indentured labor where the worker is "permanently indentured through his debt to the employer".[326][327][328] (Usmani suggests the problem might be remedied with Islamic modes of financing, and that "assets-related loans" could be converted into "leasing arrangement[s]".)[329]
M.A. Khan agrees that the debt burden has created considerable hardship, but should be blamed on "mismanagement, fraud and corruption" in the misuse of borrowed funds, rather than interest charges. If interest was to blame, Islamic financing would not be a solution (Khan argues), since it also involves costs (termed "profits" or "fees" rather than interest) to those in the developing world seeking capital.[330]
Alternatives to interest
- Nature of interest-free finance
A new riba/interest free financial system would insure that no "increased amount was charged on the principal amount of a debt",[48] as Usmani preached, the "Holy Prophet [Muhammad] ... has left no ambiguity in the fact that the creditors will be entitled to get back only the principal and will not be able to charge even a penny over and above the principal amount".[129]
Some of those promoting or writing about interest-free banking have posed zero-interest loans (and saving accounts) as an Islamic alternative to the interest-bearing loans/accounts of conventional banking. Muhammad Siddiqi reassured policy makers that interest-free accounts paying no return to savers would not mean a significant reduction in savings because savings is mainly a function of the income of the savers rather than their expectation of any return.[331] Mawdudi promised that zero return loans would allow the flourishing production of what was socially useful but which generated only a small return.[citation needed] On the other side, skeptical economist Maha-Hanaan Balala questioned how creditors would ever extend interest-free loans considering "the opportunity cost, erosion of value through inflation, risk of default by debtors";[332] and Fazl al-Rahman argued that an interest rate serves as a price for financing, limiting demand for it by borrowers, so that finance markets are not faced with limited supply and infinite demand.[333]
However, according to Taqi Usmani, emphasis on zero return was misguided.
Another observer (M.A. Khan) has reported "a consensus" among Muslim economists that Islamic finance for commercial transactions "would not be free", but would have some kind of "cost" other than interest.[330] (Charitable, interest/return-free loans are known as Qardhul Hasan in Islam.)
- Growth of alternative (Islamic banking) industry
As the Islamic revival blossomed in the last half of the 20th century, this new financial system began to be developed. By the late 20th century a number of Islamic banks formed to apply riba/interest-free principles to private or semi-private commercial institutions within the Muslim community,[335][336] In the 1980s the Pakistan regime of General Muhammad Zia ul-Haq condemned the "curse of interest" and promised to eliminate it.[337] By 2014 around $2 trillion in banking assets were "sharia-compliant",[86] (approximately 1% of total world banking assets).[338] This industry was concentrated in the Gulf Cooperation Council (GCC) countries, Iran, and Malaysia.[339]
- Modes
Islamic banking replaced riba/interest with accounts paying[229]
- zero return on deposits: "current accounts" offered for safe keeping of depositor funds with no return added to the amount deposited[Note 46] [Note 47] (In practice these deposits often include a Hibah (literally "gift"),[342] in the form of prizes, exemptions, etc.,[343] to compete with interest return of conventional banking current accounts.)
- a return varying according to the success of the project(s) the bank financed: for commercial finance the primary mode (in theory) of Islamic finance — called profit and loss sharing — would replace interest with risk sharing between the investor, the banker and the entrepreneur of the project being financed, much like venture capital financing. One form of profit and loss sharing is mudarabah finance, where the bank would act as the capital partner in a back-to-back mudarabah contract with the depositor on one side and the entrepreneur on the other side. As the "loan" was repaid, the financier (rabb-ul-mal) would collects some agreed upon percentage of the profits (or deducts if there are losses) along with the "principal" from the user of capital (mudarib);[22]
- fixed return: like interest but differing (in theory) by limiting finance to a specific sale. murabaha (credit sale) was the principal form of this type of "Asset-backed"[246] or "trading-based"[344] mode of financing (also used are Ijara, Istisna, were some others) and they were to supplement the profit and loss sharing models. As Islamic finance grew, it became clear Murabahah was not a supplement to profit and loss sharing,[345][346] but the mode used in about 80% of Islamic lending.[347][Note 48] (Explanation for this include that the structure and results of Murabahah were more familiar to bankers,[349] and that profit and loss sharing turned out to be far more risky and costly than proponents had hoped.)[245]
- Murabaha and trade-based mode of finance
The similarity between credit sales and conventional non-Islamic ("ribawi") loans has been noted (some calling murabaha a "semantic work-around" for interest charging loans),[337] necessary because businesses "cannot survive where cash and credit prices are equal", and urges that bank interest not be judged haram.[350] Critics complained that in the eyes of standard accounting practices and truth-in-lending regulations there is no distinction between (for example) getting 90 days credit on a Rs10000 (cash price) product and paying an extra Rs500 (allowed), or taking out a 90 day loan of Rs10000 that charges interest totaling Rs500 (forbidden).[351][Note 49]
Orthodox writers (such as Monzer Kahf) have defended the distinction stating attaching commodities to money in finance prevents money from being used for speculative purposes.[112]
Usmani insists that the phrase "God has permitted trade..." from Quranic verse 2:275, refers to credit sales such as murabaha,[353][354] so that "taking the time of payment into consideration" in paying more for a product/commodity, does not come "within the ambit of interest", i.e riba.[353][354] Paying more for credit when buying a product does not violate sharia law — the reasoning goes — because it is "an exchange of commodities for money",[355][356] while a bank loan is "an exchange of money for money"[355] and forbidden unless interest is zero.[353] The buyer in a credit sale is paying not "principal" and "interest", but "cost" and "profit".[357]
Other orthodox scholars[353] (A.I. Qureshi,[358] M.A. El-Gamal), instead of giving a rationale, declare that the difference is knowable only to God, something humans must obey without understanding.
Credit sales do not follow the Islamic ideal called for by pioneers of Islamic banking of doing away with the "injustice" and exploitation of un-shared profits and losses in finance.[255][256][258][260] Orthodox scholars have expressed a lack of enthusiasm for murabaha credit sales-based Islamic Banking.[360] (The Pakistan state Council of Islamic Ideology calls it "no more than a second best solution from the viewpoint of an ideal Islamic system;"[360] Usmani calls it a "borderline transaction with very fine lines of distinction as compared to an interest bearing loan".)[361] According to Usmani an (orthodox) Islamically proper murabaha and other credit sale financing are only to be used[362]
- when profit and loss sharing is impractical,[361]
- when the transaction finances the purchase of some product or commodity by the customer,[115]
- when that product or commodity is bought and owned by the bank (which takes the risk for it) until the customer's payment is complete, and
- when there are no additional charges for late payment.[117]
- Criticism of interest-free finance and its practices
The shortcomings of Islamic banking has been used by at least one non-orthodox critic as an arguments against equating interest with riba. According to M.O. Farooq, the "increasing need" of the Islamic banking industry "to resort to Hiyal (legal stratagem) to claim Shari'ah-compliance", is evidence that forbidding interest "is not tenable from Islamic viewpoint".[363] Critics/skeptics complain/note
- that aside from the belying all the lofty theoretical talk of eliminating the injustice of fixed return in finance,
- in practice not only do "murabaḥah" transactions resemble loans, but most do not follow scholarly restrictions, being merely cash-flows between banks, brokers and borrowers, with no buying or selling of commodities;[364]
- that the profit or mark-up is based on the prevailing interest rate used in haram lending by the non-Muslim world;[365]
- that the risks taken by the financier are non-existent (being insured or covered by guarantees provided by the customer);[366]
- that Islamic banks have "found it impractical to obey their own charters" and that they have "disguised interest under a variety of charges";[29]
- that "the financial outlook" of Islamic Murabaha financing and conventional interest-charging financing is "the same",[250] as is most everything else besides the terminology used.[251]
(At least one supporter (Khalid Zaheer) of the interest=riba formulation has not only been unenthusiastic about but opposed to trying to distinguish between credit sales and interest, simply urging Islamic bankers to show "concern for the plight" of the Muslim borrower and charge them no interest.)[360]
- Substitutes for other interest-based financial products and for interest in accounting and economic models
Other Islamic finance products replacing conventional bonds (Sukuk), insurance (Takaful), promise to avoid not only riba but Islamically forbidden concepts such as Maysir (gambling or speculation) and Gharar ("uncertainty" or "ambiguity").
Replacements have been suggested for the use of a bank (interest) rate for monetary policy. Siddiqi suggests two variables that can alternatively be used:
- 1) mark-up in sales with deferred payment and
- 2) ratios used in sharing modes of finance.
These ratios could be used to manipulate rates of profit (of Islamic finance). They could be determined through market forces or set by governments for the public interest, and as of the early 1980s this has been legislated in Sudan and Pakistan, according to Siddiqi.[367]Another source (Bijan Bidabad) suggests that "some public equity-based instrument" such as "Rastin Swap Bonds (RSBs)" be used for "non-usury open market operations".[368]
In modern economic theory many of the important models use interest as a key element, and in accounting interest rates are used to evaluate projects and investments. Islamic economics looks to find alternative variables and parameters — one suggestion has been for Tobin's q to replace Interest (I).[369] As a tool for comparing projects with countries where the interest rate is operated, however, it is argued that a profit rate could be used.
Non-orthodox approach
The non-orthodox position emphasizes the difference between bank interest and the riba of the Quran (sometimes arguing that contemporary "bank Interest" is a new financial technology not covered by classical fiqh),[210] and the importance of moral and practical aspects in determining what is riba.
In addition to the defence of the use of bank interest as Islamically permissible and not the cause of harm to economic prosperity, the poor, or society in general, the non-orthodox (primarily M.O. Farooq, and M.A. Khan) argue that several issues — the time value of money, dealing with inflation, early or delinquent loan payment — make a ban on all interest problematic, and that the "Islamic concept of money" used to defend the ban is itself problematic.
Government-affiliated ulama
A number of the high level jurists affiliated in some way with Muslim-majority governments have opposed a ban on all interest. Egyptian President Anwar Sadat obtained a fatwa from the Sheikh of al-Azhar ruled that interest-bearing treasury bonds were consistent with Islamic law.[370] More recently the mufti of Egypt, Dr. Muhammad Sayyid Tantawy, issued several fatawa permitting bank interest in 1991.[140][371] In 1997 Shaykh Nasr Farid Wasil (Grand Mufti of Dar al-Ifta al-Misriyyah at the time) also declared bank interest permissible provided the money was invested in halal avenues: "there is no such thing as an Islamic or non-Islamic bank. So let us stop this controversy about bank interest."[140][372][373] Dr Abd-al-Munim Al-Nimr, an ex-minister of 'Awqaf in Egypt, publicly stated that banking interest cannot be considered riba.[140][374] This has been explained as in keeping with the tendency for rulers to get the fatwas they want on "key policy issues"[370] from "official" ulama "whose task it is to legitimize" rulers' policies.[375] (Historians note the practice is not new and that jurists legitimized interest for awqaf (religious endowments) during the late period of the Ottoman rule (as mentioned above).[376]
Modernist position
In addition to service to government, another motivation of jurists opposing the formulation interest=riba has been the arguments of Islamic Modernism of the 20th century Modernist jurists, mentioned above. (Other Modernists interpreters of riba include those on the India-Pakistan subcontinent including:[140] Ja'afar Shah Phulwarai,[377] Tamanna Imadi,[378] Rafiullah Shihab,[379] Yaqub Shah,[380] Abdul Ghafur Muslim,[381] Syed Ahmad,[382] Aqdas Ali Kazmi,[383] and Abdullah Saeed.)[384][385]
Islamic Modernists tend to "emphasize the moral aspect of the prohibition of riba, and argue that the rationale for this prohibition as formulated in al-Qur’an was injustice and hardship."[386] Modernists believe pre-Islamic lending practices in Makka constituted riba and are much different from and more problematic than contemporary bank lending, which do not involve riba, according to sources such as M.A. Khan[238] and The Encyclopedia of Islam and the Muslim World.[29] [Note 50]
Makkan lending (Riba an-jahiliya) involved high interest rates charged by rich money lenders to poor customers who borrowed for purposes of consumption,[237] and led to the accumulation of large debts and often financial slavery. In contrast, most money loaned in contemporary society is for commercial purposes and investment, transacted between sophisticated parties, offering/paying interest rates determined and kept low by a competitive and regulated market[238] — most of these features not in existence when the Quran was revealed.[239] Furthermore contemporary bankruptcy laws "protect borrowers against the horrors once produced by riba".
They also advance the economic argument that "the goal of eradicating interest is both misguided and unfeasible," because interest is "indispensable to any complex economy".[29]
- Harm to borrower
Islamic Modernist scholar such as Fazlur Rahman Malik,[389] Muhammad Asad,[390] Sa'id al-Najjar,[391] Sayyid Tantawi,[140] differ from the orthodox interpreters in arguing that interest is not riba unless it involves exploitation of the needy. They differentiate between various forms of interest charges advocating the lawfulness of some and rejecting others.[392]
Abd-al-Munim Al-Nimr, also argues that riba must involve harm to the debtor.[140][393] In his fatawa permitting bank interest and declaring it non-riba, Muhammad Sayyid Tantawy argued it makes little sense to suggest that modest saving account holders are exploiting sophisticated multibillion-dollar banks that pay them the interest on their accounts.[140][371] Fixed return or "determination of the profit in advance is done for the sake of the owner of the capital (that is the depositor) and is done to prevent a dispute between him and the bank,"[140] rather than to exploit.[140]
Lawyer and Islamic scholar Kemal A. Faruki, complained that much time and energy were spent in Pakistan on "learned discussions on riba" and "doubtful distinctions between `interest` and `guaranteed profits`" in the banking system, while a far more serious problem affecting the poor was ignored:
- Practicality
Economic arguments that bank interest is needed for efficient allocation of resources and economic development, also mean that it serves the public interest. Because public interest (Maslaha), is one of the bases of divine law[395] (ranking below other sources: Quran, Sunnah, ijma’ (scholarly consensus) and qiyas (analogy)) this may exempt bank interest from charges of being haram and riba.[396]
Turkish-American economist and Islamic Studies scholar Timur Kuran questions whether an economy without interest has ever existed: "As far as is known, no Muslim polity has had a genuinely interest-free economy."[397] Feisal Khan notes that the Islamic banking industry is under criticism not just from non-orthodox who think Islam does not call for a ban on interest, but from "ultra-orthodox" who believe it has not truly excluding all forms of interest from finance. He notes complaints about the authenticity of Islamic banking from strict Muslims (Taqi Usmani has argued that the industry has "totally" neglected the "basic philosophy", undermining its own raison d'être;[249] so that non-Muslims and the Muslim "masses" have now gotten the impression that Islamic banking is "nothing but a matter of twisting documents ....")[249] and that in 2002 — 23 years after riba was first forbidden in Pakistan — the State Bank of Pakistan declared that banks and "windows" made "Islamic" in 1979 were not truly Islamic, but conventional,[398] and that other banks (such as the Meezan Bankand Al Baraka Bank) were "full-fledged" Islamic commercial banks who would be promoted by the state bank.[399] Despite this "rebooting", Khan states that the new, purified, full-fledged Islamic banks are the same in "form and function" as the old Islamic banks, and that eleven years later (as of 2013), use only a minuscule amount (3%) of profit and loss sharing, and make up only about 10% of the country's banking sector.[400]
Reply to Modernists
Most of these arguments have been criticized by Islamic revivalist writers, including Siddiqi, Zarqa, Khan & Mirakhor and Chapra, and especially by Taqi Usmani's "Judgement on Interest Delivered in the Supreme Court of Pakistan".[401]
Taqi Usmani argues that commercial, industrial and agricultural (as opposed to consumption) loans could not have been unknown to Arabs in the era of Muhammad since ahadith mention large loans and large scale caravans used by Arab traders.[402] Arabs of Muhammad's era also had "constant business relations" with the adjacent Byzantine province of Syria (Arabs used its silver dirhams and gold dinars for currency) where interest bearing loans were so widespread that a separate law was enforced to fix their rate of interest.[403] He also points out that there are a number of references to "all" riba being forbidden in ahadith, and all excess over principal being riba, but no mention of some smaller amount of interest being permissible.[129]
Time value of money[edit]
One concept instrumental in explaining (and defending) the justice of charging interest on loans[404] is the time value of money[405] — the idea that there is greater benefit in possessing money in the present rather than the future. The concept justifies the idea that later payment should be discounted and savers/investors/lenders be compensated for deferring the benefits of consumption, or — as mentioned above
- (see: Injustice of fixed return)
— compensated for "renting out" the purchasing power of their capital, much as any rental agency providing something valuable/useful is paid rent.[264]
As such, some Islamic finance supporters have attacked the idea of time value.[Note 51] Fahim Khan of the Islamic Research and Training Institute in Saudi Arabia states that the prohibition of interest "can be considered" a "sort of a denial of time value of money".[410][411]Maududi has called the difference "between the psychological values of the present and the future ... nothing but an illusion",[411] and disproven by the fact that few people "spend all their wealth on present pleasure and enjoyment."[412] Taqi Usmai has declared unequivocally that "in Shariah there is no concept of time value of money".[413]
Irfan argues that the value of money diminishes very little over time because some consumption — such as eating — can only be done over time. Furthermore, discounting for time may lead to negative outcomes such as unsustainable agricultural production with planting and grazing that causes desertification and erosion, since these bad outcomes occur in the discounted future.[414] However, Islamic banking also calls for rewarding delayed gratification in the form of "return on investment"[415] and the sale of goods on credit (endorsed by early jurists such as Muhammad al-Shaybani).[411]
Most orthodox Islamic scholars and economists have taken a middle path — insisting that a rate of discount of money overtime is an invalid concept if the rate is interest on a loan, but valid if the rate is return on capital from Murabaha or other Islamic contracts.[404][416][417][418] Critic Farooq complains that this rationalization is contradictory,[415] and amounts to denying time value in theory in theory while embracing it in practice, and that the accepting of the theory in practice explains the large (and successful) move of non-Islamic western banks into Islamic banking.[419]
Islamic concept of money
Answers to the argument (of economists such as Farooq) that lenders of money are due some kind of rent-like compensation;[264] and to the question of why charging extra to finance a purchase (in, for example, murabaha Islamic finance) is allowed, but in lending cash it is riba, [Note 52][415] can be found (supporters believe) in the "Islamic concept of money".[421]
Orthodox scholars, such as M.U. Chapra and M.T. Usmani, have written that money can only be a "medium of exchange" and must not be treated as an "asset or commodity".[302][301][422] Trading a commodity/asset, or paying a fee for its use is right and sensible (they argue), but trading or renting a medium of exchange is wrong,[423] because money is "unproductive" has "no intrinsic utility". This being the case, no return for the use of money can be justified,[424] and explains (at least in part) why it is riba.
Usmani quotes condemnations of speculation by various Western sources[425][Note 53] and the writings of the celebrated medieval Islamic scholar Al-Ghazzali that money was made to facilitate trade and should never be hoarded or used to charge interest.[425]
In response, M.A. Khan questions
- whether the distinction between asset and medium of exchange proceeds from a need "to prove that all types of interest are unfair",[427] rather than from Islam;
- how money can be a medium of exchange but not an asset, asking what "the justification for charging" zakat (the Islamic religious tax) on money is "if money is not a store of value";[427]
- how cash balances are to be entered in modern business accounting if not as assets;[427]
- if there is any good way for enforcers of Islamic law to differentiate between productive trading and the speculation which is forbidden by this definition.[427]
Early payment of debt[edit]
The opposite of credit sales — i.e. higher charge for deferred payment — is reduced charges for early payment, and is hard to justify without an acknowledgment of the time value of money and the validity of interest on loans, according to some (such as M.A. Khan).[428]
Reduction of debt for early payment is considered haram by the four Sunni schools of jurisprudence (Hanafi, Maliki, Shafi'i, Hanbali), but whether there is a consensus of Islamic jurists is unclear. According to Ridha Saadullah, such reductions have
Inflation[edit]
Whether or not compensation to lenders for the erosion of the value of the funds from inflation is allowed (and how to provide that compensation in a way that is not considered riba), has also been called a problem "vexing" Islamic scholars,[431] since finance for businesses will not be forthcoming if a lender loses money by lending.
Volume 1 of Investment Laws in Muslim Countries Handbook, states "an interest rate that did not exceed the rate of inflation was not ribaaccording to classical Islamic jurists."[12] Suggestions to solve the problem include indexing loans or denominating loans "in terms of a commodity" such as gold, and doing further research to find an answer.[432][433]
However, many scholars believe indexing is a type of riba and that it encourages inflation.[434] Islamqa.info merely states, "Yes, it is haraam to pay interest on loans even if that is because of inflation. The scholars are agreed that if it is stipulated that a loan be repaid with something extra, that is riba (usury) which is forbidden by Allaah and His Messenger."[435][436] Abu Umar Faruq Ahmad and M. Kabir Hassan state that: "Qur’anic injunctions against riba, and must be accepted as they stand." Using "interest to neutralise inflation would be tantamount to using a bigger ‘evil’ [interest] to fight a smaller one [inflation].[437]
Delinquent payments/Defaults[edit]
While in conventional finance late payments/delinquent loans are discouraged by interest that accumulates while the loan is delinquent, the price for credit payments can "never be increased" no matter how late the lender/buyer is in repaying (according to Usmani) because late fees are payment "against money", which violates the principal that credit payments must be "against commodity and not against money".[117]
Prohibition against late fees has led to the control and management of delinquent accounts becoming "one of the vexing problems" in Islamic finance, according to M.A. Khan.[438] According to Ibrahim Warde,
Warde also complains that
( Source: https://en.wikipedia.org/wiki/Riba )
Comments
Post a Comment