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The Differences between Riba, Usury and Interest - Part 3       By Shah Nawaz Khan   

Banking is a Financial Service Business

Islam does not prohibit profits in business but prohibits exploitation or unethical means in trading and all types of exchanges of goods and products. Banking is a trade and financial service, much different than the concepts of Baitul Maal, money lenders and pawn brokers of ancient times. At the dawn of Islam there were no banks and credit instruments. Goldsmiths and merchants accepted deposits for safekeeping or gave loans on harsh and cruel terms. Now bank has become a financial intermediary that performs one or more functions like safeguarding and transferring funds, lending or facilitating lending, issuing guarantees or vouching for creditworthiness, and exchanging  and transferring money. A narrower and more common definition of a bank is a financial intermediary that accepts, transfers, and creates deposits. 

 

Role of Central Banking 
The foremost monetary institution in a market economy is the central bank or State Bank as in Pakistan. These are usually government-owned institutions that perform the following functions: They serve as the government's banker, act as the banker of the banking system, regulate the monetary system  as well as activities of commercial banks licensed to work in the country and they look after both domestic and international policy goals, and issue the nation's currency. As banker to the government, the central bank collects and disburses government income and receipts, manages the issue and redemption of government debt, advises the government on all matters pertaining to financial activities, and makes loans to the government. As banker to the nation's banks, the central bank holds and transfers banks' deposits, supervises their operations, acts as a lender of last resort, and provides technical and advisory services. Monetary policy for both domestic and foreign purposes is implemented and, in many countries, decided by the national banking authorities, using a variety of direct and indirect controls over the financial institutions. Coins and notes that circulate as the national currency are usually the liability of the central bank.

International Banking
Banks have historically financed international trade and facilitated its phenomenal growth. Notable recent development has been the expansion of branches of the banks and their subsidiaries that are physically located at home and abroad, as well as the increased volume of loans to foreign borrowers and instead of the method of sharing profit and loss as is done by Islamic Banks they follow much easier method of lending money on interest to facilitate transfer from one place to other on delivery of goods.. Similarly, the number of foreign banks with offices in the Pakistan and other Muslim states has increased.

 Banking operations are closely monitored by the regulatory authorities of the Government and interest is charged within legal framework to cover operating expenses with reasonable margin for loss of purchasing power of money and likely profits if that money were invested in shares of some business. It is much simpler and less tedious than investment in a variety of profit and loss sharing ventures for which loan is obtained.  

 Bankruptcy laws protect the personal assets of shareholders of the company in debt. Just as excessive and unfair profit is profiteering, the excessive and unfair charge of interest is usury. When the interest rate is regulated by the government it would be safe not to treat it as riba.. Islam allows profit in trading but prohibits profiteering and hoarding and requires one to be honest and fair in weighing and measuring. 

 Logically only the interest rate higher than the likely profit under investment in a business venture sharing profit and risk as sleeping partner may be akin to usury. The question when interest becomes usury or Riba needs to be settled by Ijtehad and legislation. Normally the government prescribes the limits of maximum interest rates by laws and ordinances. Another method is to compare it to the price increases as measured  by the Consumer Price Indices prepared by the Government.

 In any case the rate of interest more than the likely profit for an ordinary investment in trading or purchase and sale of gold would be usury. At the time of dawn of Islam money consisted of gold and silver coins  – not fiat currency as we have now  - theories of inflation and stagflation, recession had not been developed, and there were no banks, instruments of financing or credit as wide and varied as we have now those help people in trading and industrial production and not exploiting them.  

Are Riba and Usury sins?  

It is stated in the Shariah Appellate Bench's judgment: "The Holy Qur'an did not give any definition for the term for the simple reason that it was well known to its immediate audience." However, the underlying principle that can be deduced by  logic and reasoning after reading all the verses and hadiths relating to riba, appears to be  unethical gain in dealings including usury i.e. charging excessively high and unethical rate of interest on loans. .  

Orthodox Scholars like Maulana Taqui Usmani say  on the basis of their conjecture that prohibition on interest  is like the prohibition of pork, liquor, gambling, adultery etc, which were imposed without giving any hard and fast definition because all these terms were well known and there was no ambiguity in their meaning. But the verses of Quran prescribe rigorous punishment for adultery. Bible and Quran prohibit pork apparently because it has no neck for proper slaughter and it is the filthiest animal feeding on muck, animal excrements or feces and mud and pork is considered to be causing several serious diseases. The historic reasons for treating usury as vile are quite different than the prohibition on pork, adultery. alcohol etc. 

The historical rendition of riba or usury as a vile enterprise dates back centuries before Islam and stems from the fact that charging exorbitant interest had been a flagrant manifestation of unchecked greed and caused much misery and grief to the poor and needy to an extent that even nominal interest continued to be misconstrued for a long time as wicked and unjust. Even in English literature usury was depicted as vile and cruel by such great authors as Dante, Shakespeare and Ezra Pond. But that was before the advent of paper currency without the backing of gold.

One of the reasons on account of which Jews were hated in Europe was that they indulged in usury charging exorbitant interest such as 5 to 10% PER MONTH on the loans given or the goods sold on credit. But they cleverly succeed on the basis of lies and deception to gain sympathy of the Western world after World War 2 harping on the exaggerated and distorted facts about holocaust. 

However, after Financial Services were developed and streamlined on modern and ethical principles, the people started in distinguishing between usury and interest. Usury is now treated in many countries as a crime of charging higher interest on a loan than the law permits. State laws set the maximum amount of interest that can be charged for a loan of money. A lender that charges higher than the maximum amount of interest is guilty of the crime of usury. In addition, courts may modify contracts that contain usurious rates of interest by reducing the interest to the legal maximum.

According to orthodox ulema Riba is a sin under Islamic doctrine and even those hired to write the contract or who witness (and thus confirm) the contract are a party to the sin. Some Ulema equate it as same type of prohibition as for pork, adultery and alcohol. But that appears to be based on conjecture and has not been substantiated by Quran and hadiths. But Quran condemns usury as an unjust act rather than a sin in the following words.

 002.279 Translated by YUSUFALI: “If ye do it not, Take notice of war from Allah and His Messenger: But if ye turn back, ye shall have your capital sums: Deal not unjustly, and ye shall not be dealt with unjustly.”.

The questions arises why Allah is not waging war against Switzerland the Mecca of Banking business and financial giants like US, Germany, Japan and other rich countries enjoying highest ever standard of living as credit is playing a vital role in development of their economies. The answer appears to be that they have anti-usury laws and bank  interest rates are regulated by the government and they give lot of aid to poor nations.

 The orthodox view about prohibition on bank interest in Islamic countries like Sudan, has stifled the growth of their economies as money can be lent lawfully only for either charitable purposes (without any expectation of return above the amount of the principal), or by entering to an agreement for sharing profit and loss in for doing lawful business and in such a case agreement as sleeping partner is also permissible. But orthodox ulema ignore the fact Quran prohibited exploitation in all kinds of dealings 

 Profit and Trading:  

Because of the stress laid in Quran on acquisition of knowledge and reason, it can be said that behind every commandment or prohibition mentioned in Holy Quran there are solid reasons and justification generally ascertainable by our reasoning capabilities

Selling of item purchased at whole sale price of say RS. 1000 per piece for RS. 1200 or even RS. 1500 is permissible trading. You can even sell it in 12 monthly installments of RS. 150 per month fetching RS. 1800, which is also permissible. But obtaining a loan from a bank for say 10% interest for cash purchase of RS. 1000 is misconstrued as Riba even when it would mean paying it back with only RS. 100 interest after one year and thus I save RS. 700. Thus charging RS. 100 as interest is haram but devouring profit of RS. 200 or RS. 500 is halal! It does not sound logical. Islam is a perfect religion and does not allow such anomalies. The problem is in our interpretation. 

 Indeed the profession of money lending as was practiced in the past must not be allowed and only commercial banks should be allowed to do that according to the rates regulated by the Government. The practice of pawn broking is ancient, as is recognition of the danger it involves of oppressing the poor.

 In the old days the moneylenders used to charge such excessive amount as RS. 200 per month or so for a loan of RS. 1000/- and that Biyaj (rent on money) was payable until the principal was cleared in lumps sum and rent on money was compounded in case of non-payment, whereas the principal sum of debt remain intact. Such usurious practices have been made illegal in most countries just as they were prohibited in Bible and Quran. 

 The Role of Credit in Industrial and Economic Growth

In the industrial and economic growth credit has played a vital role. Without the incentive of interest so many methods of credits cannot work as existing. Micro credit schemes in poor countries like Bangladesh are helping in alleviation of poverty enabling un-employed to stand on their own feet paying nominal interest instead sharing the higher profit. 

 Credits allowed by IMF, World Bank, Asian Development Bank etc. are helping the developing countries in economic progress. Such assistance would not be viable without the element of interest to cater for administrative cost and maintenance of enough resources for granting credit.

 The chief function of business credit is to facilitate the transference of capital items such as land, machines, plants, raw material, vehicles, cash etc. from those who own or produce it to those who need it for their business or industry, in the expectation that the profit from its use will exceed the interest payable on the loan. Thus business credit increases the productive power of the capital items and profits of the entrepreneur.

 Consumer credit permits the purchase of retail commodities without the use of cash or with the use of relatively little cash. It is estimated that some 90% of all wholesalers’ and manufacturers’ sales, and more than 20% of all retail sales are made on a credit basis. Credit facilities help acquire houses, vehicles etc. at lower cost than that sold under installment plans. Further, vendors of selling products on installment schemes also need credit from different resources.

 Fiat Money (Paper Currency) is Prima Facie Fraudulent Money

Orthodox Ulema opine that Islam made a clear distinction between trade and Riba and that trading and profits are allowed and Riba is prohibited, but they have no solution for inflation and controlling purchasing power parity in international trading and exchange of foreign currencies.

 The paper money, nowadays in almost all the countries, has no commodity value, and has a fluid market value only insofar as the Government that prints and supplies it keeps it limited in its supply. In theory, the paper money can have a stable value but, in practice, paper money has always resulted in inflation. One simply has to examine the gold and silver rates that were prevailing during last one hundred years.

 For example, consider the experience in different countries with paper money following the disconnection of our money from the gold standard since 1970s. The gold and silver now cost more or less 200 times than what they used to cost in 1960s. During the 1970s, the rate of inflation accelerated from creeping into galloping, interest rates rose up to double-digits while the purchasing power of money kept on regressing and thus real rates of return went negative, business cycles in most countries worsened, the price of energy rose manifold and there were energy shortages. It was a time of diminished expectations, middle-class stagnation and rising poverty. The worst affected are the Third World Countries who have neither strong industrial infrastructure nor such natural resources as oil and precious metals. 

 Reduction in purchasing power money constitutes as a breach of trust of the people according to the standards of good governance (protecting the interests of the masses), trust, measures, weight and balances as prescribed in Quran-e-Hakim and the Sunnah. Deficit financing and printing of paper money without any base can also be termed as a practice akin to indirect form of 'Riba' strictly prohibited by the Holy Quran.

 Senior economist like Dr. Lawrence Parks termed fiat money as fraudulent money. He wrote: "Today, fiat money, money that is created out of nothing and without work, is used worldwide. The reason monetary authorities have gotten away with this prima facie fraudulent money is a combination of coercion (specifically legal tender laws in every nation and restrictions the IMF has put in place internationally that prohibit member countries from linking their currencies to gold, and only to gold), misrepresentations, and nondisclosure of material information. Since the 8th century in China, every experiment with fiat money has ended in disaster, many times destroying the middle class, that group that protects society from the barbarians. To counter this risk and to protect and preserve our civilization, it is essential that we once again return to "the standard of every great civilization": gold-as-money."

 Another great economist John Maynard Keynes (1883–1946), had shown:

"By a continuing process of inflation governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens".

 Gold Standard is the Best.

In the 7th century AD at the time of dawn of Islam, money consisted of gold and silver coins and bars. That was the kind of money whose purchasing power was not only stable but also tended to appreciate, like the worth of land. From the very beginning, Muslims used gold and silver coins called a Gold Dinar and silver Dirham as their money. The Gold Dinar remained the official Islamic currency until the collapse of the Ottoman Empire in 1924.

 The idea of revering to Gold Dinar was adopted by Malaysian Prime Minister Mahathir Mohamad who conducted bilateral talks during the year 2002 with several Islamic countries, including Bahrain, Libya, Morocco and Iran, to convince them of using the Islamic dinar as a way of payment in their commercial dealings with Malaysia.

 The idea of the Islamic gold dinar was primarily aimed at creating sound money with stable purchasing power and at minimizing the hegemony of the U.S. dollar and to use the gold once again as an international currency because the value of the paper currencies is in continuous fluctuations that are exploited by the big multi-national companies and G 7 countries much to the harm of the Third world. However, it appears that the Organization of Islamic Countries and Arab Monetary Fund are not enthusiastic about creating an Islamic Monetary Fund or establishing an official mint and security printing press for printing Dinar and Dirham currencies backed by the gold and silver reserves. Oil rich Arab Muslim countries can easily form a consortium or Islamic Monetary Agency

 Islamic Development Bank

Oil rich Islamic countries were wary of the fact that they were not among the gold producing countries and some Western economists have been advising that there is not enough gold in the world to cope with the growing economies and in times to come when the per capita possession of gold would be a minute fraction of an ounce of gold. They were influenced by the International Monetary Fund and were persuaded that Special Drawing Rights (SDR) as devised by the IMF can help in maintaining the stability of the currency in a better way than the gold.

 The Islamic Development Bank (IDB), a specialized institution of the OIC, is an international financing institution.  he Bank was formally inaugurated on 15th Shawal, 1395AH. (20 October, 1975).  The purpose of the Bank is to foster the economic development and social progress of Member States and Muslim Communities individually as well as collectively in accordance with the principles of the Shariah – a mammoth task towards which little progress is seen. The functions of the Bank are to provide equity participation and grant loans for productive projects and enterprises and to  give financial assistance to member states in other forms for their economic and social development and to foster foreign trade among member countries. 

 The authorized capital of the Bank is six billion Islamic Dinars divided into 600,000 shares among subscriber.  The value of the Islamic Dinar, which is the unit of account of  the  Bank, is equivalent  to  one Special Drawing Right of the International Monetary Fund (SDR). The subscribed capital of the Bank is 4 billion Islamic Dinars. One Islamic Dinar =1.3 US Dollar.

 Equivalence of the so-called Islamic Dinar of IDB with US dollar 1.3 is questionable because the value of this Dinar is supposed to be One Special Drawing Right of the International Monetary Fund. And the value of one SDR in terms of United States dollars is determined daily by the IMF, based on the exchange rates of the currencies making up the basket, as quoted at noon at the London market. (If the London market is closed, New York market rates are used; if both markets are closed, European Central Bank reference rates are used.). The web site of IMF on Friday the October 26, 2007 was showing the rates of 1 USD = 0.638075 SDR and 1 SDR = 1.56721 USD.

 Misconception about Islamic Economic System

Some badly educated mullahs and leaders of Islamic parties have been saying if the Islamic Economic system is adopted banning interest and collecting Zakat and sadqats it will remove poverty. But the fact is that Islam does not prescribe any economic or political system and only broad moral principles are laid down for adopting one as well as all other aspects of life,

 But most economists agree that Poverty is an economic condition in which people lack sufficient income to obtain the minimal levels of health care, food, housing, clothing, and education generally recognized as necessary to ensure an adequate standard of living. Further, accessibility to clean water, means of transport and communications etc. make the difference between destitute and poor besides the quality of food, shelter and clothing. Even the upper middle class in most Muslim countries many Third world countries lives much below the standards of living enjoyed by the poor in the West.

 Much of the world's poverty is due to a low level of economic development, illiteracy and widespread unemployment and corruption and political instability. Negative attitude toward wok, lack of discipline and apathy to teamwork and inability to harness and utilize natural resources can also be regarded as the reasons for lack of economic development.  Please read the article "Jihad Against Poverty. Click here to read the article.

 Let there be no illusion that Zakat and Sadqas are enough to help the poor on national level. Because in most Islamic countries like Afghanistan, Pakistan, Somalia etc. if the entire wealth of nation is distributed equally everybody would become poor. That can be gauged by the GDP figures. Average Pakistanis, Indian live on less than a dollar a day and much greater amount is spent by the Westerners on feeding their pets. But the fact is that we are poor not only financially but also intellectually as seen by the list of modern inventors. Also see the article "Capitalism and Islam" Click here.

 Religious jurisprudence means change

The fact remains that majority of Islamic conservative scholars hold that banking interest is equivalent to usury or "riba" - the earning of money without doing any work for it. However the verdict of the Islamic theological research committee of Egypt's Al-Azhar institute - seen by many as the philosophical center of the dominant Sunni strand of the faith - has voted 21-1 to approve fixed interest rates and it is hoped the views of other ulema would change..

  "Religious jurisprudence means change, and it is illogical to remain frozen while the world changes around us," Sheikh Saber Talaab, head of the research committee secretariat, was quoted saying that and "So long as we do not go against what is written (in the Koran) or the Sunnah (Holy Prophet's tradition), we have a clear conscience."

 The Indonesian scholar of Islam, Zuhairi Misrawi agreed with Al Azhar verdict. He opined that Fatwa should involve all elements of society. In the tradition of bahtsul masa’il (problem research used to be held in pesantren) that discusses about current matters (masa’il waqi’iyyah) performed by Nahdlatul Ulama (NU) for instance, the ulema were aware of their incompetence in the contemporary issues, therefore they asked the opinion of the experts (expert in medical field, etc) in formulating a fatwa. Hence, they can comprehend the object of fatwa well and accurately. He goes on to write: 

"Sheik Tantawi, for instance, consulted banking experts to study to what extend bank interest provides both benefits to the client and to the bank. Should bank interest be included in usury? During his time as the head of the Fatwa Council of Egypt until he was being Sheik al-Akbar al-Azhar, he has always insisted to issue the fatwa that bank interest is allowed (halal), partly based on the consultation with banking experts.  

Conclusion:

Conventional bank interest as regulated by the Government cannot be regarded riba or usury. Technically it happens to be a provision or substitute for the profit if the money were to be invested in legitimate business instead of loaning. It could also contain a provision for loss of purchasing power of money under the fiat system of money.   

 

Part 1 Part 2 Related Article

Shah Nawaz Khan, ACII (London)  retired as Executive Director of State Life Insurance Corporation of Pakistan and dealt with queries of Islamic Ideological Council about life insurance business.. For the past 15 years his articles have been appearing in Insurance Journal of Pakistan. You can email him <shah1936@yahoo.com>

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