RIBA BANK INTEREST AND THE RATIONALE OF ITS PROHIBITION

RIBA BANK INTEREST AND THE RATIONALE OF ITS PROHIBITION – Book Sample

Chapter : ISLAM AND ITS LAWS – RIBA BANK INTEREST AND THE RATIONALE OF ITS PROHIBITION

• Tawheed                                                                            
• Shariah and its Objectives                                                
• Maqasid al-shariah                                                          
• Justice and Equity                                                             
• The Individual                                                                   
• Role of the State                                                                
• History                                                                               
• Justice in Finance                                                              
• Islamic Rules for Exchange                                               
• Conclusions                                                                       

Chapter :PROHIBITION OF RIBA

• Quran on Riba                                                                   
• Meaning and Incidence of Riba                                        
• The Riba Owed to Abbas                                                   
• Reason of Prohibition                                                        
• Profits Versus Interest                                                       
• Quran’s Emphasis on Charitable Giving                           
• Prophet’s Implementation of The Prohibition of Riba     
• Understanding of Law of Riba by Companions of the Prophet and those who Followed   
• Understanding of the Law of Riba Down the Ages           
• The Issue of Bank Interest                                                
• Arguments for Bank Interest                                            
• Conclusions                                                                       

Chapter  ECONOMY WITHOUT INTEREST 

• Liability Side of an Islamic Bank
• CONTENTS
• ·         Capital Protection           
• ·         Assets of an Islamic Bank                                                                                      
• ·         Sharing Based Modes of Finance                                                                        
• ·         Trade Based Modes of Financing                                                                       
• ·         Murabahah                                                                                                                 
• Murabahah Versus Interest                                                                                 
• ·         The Problem of Default                                                                                          
• Other Asset Based Instruments                                                                          
• ·         Islamic Banking in the Private Sector                                                               
• ·         Non Bank Islamic Financial Institutions                                                         
• Islamic Investment Companies                                                                          
• Islamic Mutual Funds                                                                                             
• ·         Islamic Insurance/Takaful Companies                                                            
• ·         Stocks, Options, Derivatives and Risk Management                                   
• Islamic Finance Under State Sponsorship                                                       
• ·         Islamic Banking and Finance in South East Asia                                          
• Islamic Finance in Bahrain.                                                                                 
• ·         Islamic Finance in Sudan                                                                                      
• ·         Iran, Turkey                                                                                                               
• ·         Pakistan, Bangladesh                                                                                             
• ·         The Islamic Development Bank                                                                          
• ·         Islamic Finance and International Finance                                                    
• Conclusions                                                                                                                

Chapter :        ECONOMICS OF ISLAMIC FINANCE

• ·         Relative Stability of Islamic Financial System                                               
• ·         Absorption of Real Shocks                                                                                     
• ·         Stability in the Monetary Sector                                                                          
• ·         Exogenous Sources of Instability                                                                       
• ·         Relative Stability with Fixed Liabilities                                                           
• ·         Limited Scope of Speculation in an Islamic Financial System        
• ·         Relative Efficiency of an Islamic Financial System                                      
• ·         Uncertainty and Efficiency                                                                                   
• ·         Meeting Uncertainty                                                                                               
• ·         Comparative Advantage

• Fairness of the Islamic Financial System
• Sharing Enhances Equity
• Growth with Islamic Finance
• Conclusions

Chapter : MEETING SPECIAL NEEDS

• Government Finance, Financing the Consumer, Microfinance and Finance for Muslim Minorities
• Consumer Finance
• Islamic Modes of House Finance
• Credit Cards
• Financing Agriculture
• Government Finance
• Deficit Financing
• Muslim Minorities and Islamic Finance
• Conclusions

Chapter : MONETARY MANAGEMENT, INFLATION

• AND INDEXATION

• Regulation and Governance
• Inflation
• Indexation
• Conclusions

Chapter : CONCLUSIONS AND PROSPECTS

• Future of Islamic Finance

FOREWORD – RIBA BANK INTEREST AND THE RATIONALE OF ITS PROHIBITION

The Visiting Scholars Program was introduced during 1413H as part of IRTI’s multi-pronged efforts to develop Islamic economics and finance. The program aims at enabling external scholars to visit IRTI on short-term basis in order to carry out certain well-defined research task or project. We were fortunate to have Prof. Nejatullah Siddiqui last year who kindly accepted the invitation to come to IRTI under this program. A tangible benefit of his visit to IRTI is this book.

IRTI felt that there was a need to explain riba, bank interest and the rationale of its prohibition in modern terms to the general public and scholars who are unfamiliar with the developing field of Islamic banking and finance. Prof.Nejatullah Siddiqui also shared this feeling. He has therefore written this book with this perspective.

Starting from shariah and economic reasons for prohibition of riba the book shows that this prohibition aims at preventing injustice and promoting fairness, equity and efficiency. It then covers the entire financial system, its various components as well as macro-monetary management, and highlights the impact of prohibition of riba along with alternative arrangements under Islamic system showing how the above objectives are achieved. The clear and succinct writing style of the author will help the reader gain understanding of the subject and the issues involved.

INTRODUCTION WHY THIS BOOK?

Muslims have always agreed that riba is prohibited. What constitutes riba has, however, been a subject evoking deliberation and debate over the centuries that followed the age of divine revelation. Not surprisingly, the practice has reflected the differences in interpretation. Yet the core idea, the prohibition relating to the additional payment demanded by giver of a money loan, has sustained itself in the imagination of Muslim peoples in all ages.

Its avoidance in practice has, however, had a chequered career. It has ranged from strict adherence to conformity with some exceptions, made on the ground of necessity or because of living outside the lands ruled by Islam, to widespread violations under some stratagem or other. During the modern times with the system of money and banking based on interest, controversy surrounds bank interest, is it the riba prohibited in the Quran or is it not? The overwhelming majority of religious scholars and most of the laymen consider bank interest to be riba while a few scholars and a section of Muslim laymen think it is not. The issue has acquired political significance in recent times because of some Muslim countries’ constitutional commitment to adhere to Islamic Law (shariah).

This book is a modest effort to clarify the issues involved. In the first chapter we put our subject of study in perspective by describing Islam’s worldview and the purpose of laws in Islam. How the quest of fairness in the ‘ordinary business of life’ leads to a bunch of rules constraining individual freedom and guiding the state in its supervisory role is explained.

The second chapter focuses on the meaning of riba in the light of the relevant texts. Muslims’ understanding of the concept and coverage of riba is traced through the ages till our own day. The effort by some to declare modern bank interest outside the scope of prohibited riba is put in historical perspective. After examining their arguments it is concluded that bank interest is riba.

The third chapter examines what the prohibition of bank interest would do to a modern economy. It explores the alternatives to interest based institutions in the light of the developments of interest-free Islamic banking theory and practice since the middle of the last century. It demonstrates that the economy can function smoothly without the institution of interest on the basis of Islamic finance.

The fourth chapter focuses on some distinguishing features of interest- free Islamic finance at the macro-economic level. It is argued that Islamic finance is conducive to greater stability and more efficiency than conventional finance. It is a fairer arrangement capable of leading human society to greater equity and higher growth.

The fifth chapter shows how Islamic finance meets certain special needs like government finances, finance for the consumers, microfinance, especially for the rural sector, and interest-free financial arrangements for Muslim minorities.

The sixth chapter deals with monetary policy and the problems arising out of changes in the purchasing power of money in the context of loans made in money. The seventh chapter concludes the study by summarizing the findings. A Bibliography followed by an Index completes the book.

ISLAM AND ITS LAWS

In this chapter we provide a perspective for what is to come in the later chapters. These later chapters discuss a particular provision in Islamic law, the prohibition of riba. We have first to see what Islam is and what place Law has in it.

The laws in Islam cover many aspects of life. For our study of a law relating to the economy we need to ask how economic life is perceived as an aspect of life in general and what are the goals of Islamic law relevant to this particular aspect of human life.

Placing the prohibition of riba in the context of the goals of the shariah (Islamic law) will help us in the next task, the enquiry whether modern bank interest is included in the riba prohibited in Islam. This task is in fact taken up in detail in the next chapter as it involves going back to the relevant texts of Quran and Sunnah and their understanding by the scholars over the ages. In this chapter we confine ourselves to the general thrust of the laws relating to economic transactions in the context of the relevant goals of shariah whose focus is ensuring justice and fairness in social, economic and political relations, and survival with dignity for each and all.

This makes us ask what is just and fair and how Islam mobilizes spirituality and morality too in order to realize justice and equity rather than rely exclusively on law. Lastly, we have to ponder how the social goals are to be achieved without endangering individual freedoms so crucial in Islam.

In this context we go beyond law to philosophy, economic analysis and history, including recent history, to arrive at conclusions which can by their very nature be only tentative. It is referring back these conclusions to Islamic law and history that can give them somewhat greater credibility.

Tawheed

Islam’s worldview inheres in tawheed. It is a relationship with the Only One that excludes a similar relationship with any one else. It is man’s commitment to Allah making Him the only source of value. It implies emancipation and restoration of man’s essential freedom from all other bondages. It envisages a particular relationship with environment as Allah’s creation, neither to be feared nor revered, but looked upon as partners in living as Allah wills.

The consciousness that tawheed creates gives humans a sense of being equals. All human beings are equally free and independent of one another in their dependence on Allah. In passing through the divinely conducted test that is life all humans are invited to utilize the God-given faculties of observation, analysis, reasoning and judgment. The following verses from the Quran carry these messages home about the essential dignity and equality of human beings, about life being a test and about the need to think, observe and be aware of one’s individual responsibility.

Verily we have honored the children of Adam. We carry them on the land and the sea, and have made provision of good things for them, and have preferred them above many of those whom we created with a marked preferment. (17:70)¹

Blessed is He in whose hand is the Sovereignty, and He is able to do all things. Who has created life and death that He may try you, which of you is best in conduct; and He is the Mighty, the Forgiving.(67:1-2)

He it is who has placed you as viceroys of the earth and has exalted some of you in rank above others, that He may try you by (the test of) that which He has given you. Lo! Your Lord is swift in prosecution, and Lo! He is Forgiving, Merciful. (6:165)

Have they not pondered upon themselves? Allah created not the heavens and the earth, and that which is between them, save with truth and a destined end. But many of mankind are disbelievers in the meeting with their Lord. (30:8)

Say (unto them, O Muhammad): I exhort you unto one thing only: That you awake, for Allah’s sake, by twos and singly, and then reflect: There is no madness in your comrade. He is naught else than a warner unto you in face of a terrific doom. (34:46)

And each one of them will come unto Him on the Day of Resurrection, alone. (19: 95)

¹ All translations are from the Meaning of the Glorious Quran by Muhammad Marmaduke Pickthall, with slight linguistic adaptation to modern English. The numbers in parentheses are those of the surahs (chapters) followed by the verses.

From accountability follows the idea of trusteeship insofar as property is

concerned.

Believe in Allah and His messenger, and spend of that whereof He has made you trustees; and such of you as believe and spend (aright), theirs will be a great reward. (57:7)

It will have been noticed that every verse quoted above presumes that the individual human being, the addressee, is free to choose. The test that is life and individual accountability on the day of judgment make sense only with freedom. There is to be no coercion.

There is no compulsion in religion. The right direction is henceforth distinct from error. And he who rejects false deities and believes in Allah has grasped a firm handhold, which will never break. Allah is Hearer, Knower. (2:256)

The picture is now emerging; the idea is to create an environment in which human beings are free to choose, having been informed about right and wrong, good and bad…. Those choosing the right path are then guided further on. Those failing to do so have time to learn and change. They are not coerced into conformity. But social order has to be maintained with a view to ensuring survival with dignity and for free choice to continue to be possible. This is where Law comes in.

Shariah and its Objectives – RIBA BANK INTEREST AND THE RATIONALE OF ITS PROHIBITION

Islamic law covers all aspects of life. For clarity of understanding one has to distinguish between laws related to ibadat (worship, prayer) and laws relating to muamalat (transactions, worldly affairs). We have also to distinguish between rules of conduct, injunctions, exhortations, etc. that are not legally enforced. Sometime there are gradations in a rule recommended in general but legally enforceable in certain circumstances. To put these categories in perspective one has to consider the relationship between law and morality.

Morality is the basic thing as it follows from the spirituality in religion like the existence of God, life after death, accountability, a feeling of equality with other human beings, a sense of shared creature-ness with all that is in the…

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