Interest and Islamic Banking

Interest and Islamic Banking

By Dr. Abu Aminah Bilal Philips

Contemporary Issues Program

Opening

In the name of Allah, the Beneficent, the Most Merciful, I'd like to welcome you, dear viewers, to our program, Contemporary Issues. In this segment of our program, we're shifting now to the area of economics, a field which Islam addresses. There are laws within Islam which govern human economics, how their economic dealings should function.

Basic Principles of Islamic Economics

When we look into Islamic legal requirements of business deals, et cetera, et cetera, sale, purchase, these type of things, trade, we find that one of the basic principles is that it should be free from deception. Anything which involves deception, where you're deceiving the buyer of really what you're selling, you know, he thinks he's buying one thing, you're, in fact, selling something else, you know, however this may come in all the different forms, from Islamic perspective, all of that is forbidden. The other basic principle we can see there is that the issues of interest, where business dealings involve interest, this is not another area where things, again, are strictly forbidden.

So what we know today as modern mortgages, people buying home with bank loans, you have to pay back the bank over this period of time and this kind of thing, or taking out loans for cars, or a variety of other purposes where you end up paying back the money plus an additional amount, this has been forbidden in Islam. And really it is not something new in that you can find, even in the Old Testament, in ancient beliefs of the followers of Moses and others, that interest is forbidden.

Interest in Previous Scriptures

We find in Deuteronomy 23 verse 19:

"Thou shalt not lend upon interest to your brother, interest on money, interest on victuals, that's food or provisions, interest on anything that is lent for interest, is a basic prohibition."

[Deuteronomy 23:19]

However, and this has been understood, however this prohibition for the Jews, there was a modification there. In verse 20 it goes on to say:

"To a foreigner you may lend upon interest, but to your brother you shall not lend upon interest."

[Deuteronomy 23:20]

So interest became for Jews forbidden to take from themselves, from each other, but it was okay to take it from the Gentiles, the others.

History of Interest in the West

And the prohibition of interest actually existed in the Christian world right up until the Middle Ages, you know, the 13th, 14th century, otherwise prior to that it was banned. We find, you know, Shakespeare writing about the merchant of Venice, the pound of flesh, individual lending an interest and seeking a pound of flesh in return for those who couldn't pay it. You know, this idea, this was the evil Jew, this is what he was, how he was functioning, taking people's flesh even, you know.

So it was opposed thoroughly in Western society, but eventually though the people were able to influence the religious beliefs, the economic segment was able to influence it under the Jewish influence to a certain, to the degree that they introduced it eventually, interest on a low scale and eventually it spread, spread, spread until it became the foundation of Western economics. Interest dealings became that foundation. However, in the 70s of course Islam totally prohibits interest, Allah makes no uncertain terms about its prohibition, even talking about the fact that people will compare it to trade, right, you know, that they will say that trade is just like interest, interest is just like trade, there is no difference, you know, you lend somebody a property, they pay a fee for it, you lend somebody your money, they pay a fee for it, it's just the same.

But the trade in money, Allah says, is devoid of any good, it's cursed, whereas proper trade is blessed by Allah. So, dealing in interest is forbidden for Muslims, and Muslims have functioned economically over the centuries without dealing with it, however, once the Muslim world became conquered by Western civilization, mainly out of Europe, England, France, Germany, etc., conquered various Muslim lands, Holland, Indonesia, then they introduced with their conquest interest-based governmental systems, and the banks were introduced into the countries, and interest and the belief and the practice of it spread.

The Birth of Islamic Banking

With the revival of Islam in this century, we find that the proposals for Islamic banks as an alternative, you know, came up, especially in the early 70s, the concepts were being proposed, you know, because things had

been worked out, the plans for it had been identified, you know, King Faisal's son or brother, Muhammad al-Faisal, working on it.

When the idea was first broached in the West, the Western economists, etc., they scoffed at the idea, this is ludicrous, the idea of banking without interest, what kind of bank is this? It cannot possibly work, though, in their own books, in their own theories, they will tell you that the lower the interest rates, the healthier the economy, the better the economy is, the higher it is, the weaker the economy, this is well known, but the idea of zero interest, you know, you see it getting lower and lower and lower, the economy gets better and better and better, but the idea of zero interest, no, this could not be dealt with, they didn't want to deal with it, that idea was forbidden, why? Because the elements that control the banking systems of the West, they would be put out if they shifted to interest without, banking without interest, so they, you know, keep that concept in their strong and they continue to teach it, absolute necessity, whereby people can just live, no effort on their part, people take their money, they have to pay back more money, you know, no effort involved here.

Success of Islamic Banking

Well, what we find today, you know, after some 30 years have passed, that the majority of the major banks of the West now carry Islamic portfolios, they offer business without interest, banking without interest, they're offering it now, bank, all the various big banks, Bank of London, etc., they're all offering it now, why? Is it just to capture Muslim money, because they don't want to lose their clients, no, because a bank is not going to do that just to maintain its reputation, no, because it's not going to involve itself in what it sees as clear financial loss, the only reason why they're getting involved in it is because they've seen its successes, the Islamic banking has reached a massive state of success, this is, what was thought impossible has actually been implemented, today you have more than 200 Islamic financial institutions worldwide managing funds of over 150 billion U.S. dollars, you know, and even with its strict codes, Islamic banking is growing at a fast rate of some 15% annually over the last 10 years.

In recent years, Iran, Sudan, Pakistan, you know, and others have banned traditional commercial banking, you know, based on interest and adopted Islamic models. Of course, Pakistan is not complete as it has been in Iran and Sudan, etc., but more and more countries are broaching this idea, Malaysia is experimenting with it also, Islamic banking is developing there quite strongly, and we find Muslims, wherever we go, looking into this, calling for this as an alternative to the other banking, interest-based banking institutions.

How Islamic Banking Functions

So, how does the Islamic bank function? Well, there are different means by which the bank maintains its money.

Murabaha

One of those means they refer to as murabaha, you need to buy something, the bank goes and buys it for you and sells it for you, sells it to you at a higher price, buying commodities and selling them, right, based on demand.

Musharaka

Secondly, you have what is known as musharaka, where two financiers, they're partners, they come in, they put their time, effort, money together, and they share the profits, proportionately.

Mudaraba

Then we have what is known as mudaraba, where, again, two parties come together, but one is bringing all the money, the other one is making all the effort, and they share proportionally again the profits. But in all of these cases, they also share the losses, the losses of losses.

This is the point which makes them different, that if there are losses, they all share in the losses. In the case where it is a matter of one person providing money, no effort, and the other one just providing the effort, obviously the financial loss will be borne by the one who put in the money, whereas the one who put in the effort, of course, it will be the loss of the value of their efforts. But where there are equal partners or similar partners sharing, then they both are going to share in the financial losses.

And you'll see when a person invests in a financial Islamic institution, their profits are not fixed. They cannot be given fixed amounts. Every year you'll get this much returns on your money.

No, this may vary from month to month, half year, half year, annually, it will vary. And as such, the profits cannot be fixed.

Islamic Banking vs Western Banking

And the difference between Islamic banking and Western banking is that it's about credit.

What is your credit? If you have money, you have reputation, you have contacts, whatever, you can get loans. And you pay these loans back. This is all the bank is interested in.

You pay the loan back. It doesn't matter what you're going to do with this money. If you're going to build something corruptive which is going to hurt the society, or you want to squander it, whatever, as long as you pay that money back, that's what's most important to the bank.

And through these mortgages systems and these interest-based systems, you find that people run into financial loss. They're encouraged to live on a credit system, whether it's the banking cards and things like this. You buy

more than you have the money to pay, and then you end up paying up with interest and this type of thing.

Eventually, much of this becomes a dead weight on the backs of the people, and they find themselves in financial crises. The bank steps in, repossesses their car, their homes, they're kicked out in the streets.

The Human Cost of Interest

So that you find in America, as they estimated way back in the early 90s, that there are over 2.5 million Americans living in the streets.

They have no homes, no place to go. They live in the streets. This is something normally we associate with the very poor countries of the third world, you know, the black hole of Calcutta, you know, as the British used to write about it, you know, Calcutta, you know, people are living there and just dying in the streets.

Well, it's happening in America. People tend to associate America with, you know, ultimate success and riches, the skyscrapers, glittering buildings. But nobody bothers to look at the bottom.

You know, at the night when time comes, people are leaving their work and going to sleep. You see all these people coming up, putting their pieces of cardboard on the ground and sleeping right there. Winter chill catches them.

Sometimes they freeze to death. They're in the streets. So you have some 2.5 million Americans living in the streets.

Most of them, you'll find when they've gone into, looked into the circumstances, what happened to them, how did they end up in the streets? It was due to interest-based problems. Either they couldn't make their bank loans or they had some kind of medical problems which causes their money to be gone. They can't make the payments anymore.

So their stuff is repossessed and they're out on the streets, living in the streets, themselves, men, their wives, their children, these kind of things happening. Terrible situation. It's unimaginable.

The richest country on the earth, you know, having this kind of situation where they don't have homes, they cannot provide homes, they cannot deal with the situation of their homeless. This is something which shows a kind of a heartlessness in that system. Though people like to talk about mercy and love and all these different things, the interest system is a very harsh system.

The Heartlessness of Interest

It doesn't take into account the contingencies of life. A man borrows money for his farm. His intention is to grow products which people are going to benefit from, from his profits, he will pay you back.

But now something happens, a natural phenomena, you know, some disaster, natural disaster comes and destroys all his crops. And you're still going to ask him for that money back with interest, regardless. I don't care, I don't want to hear your problems, just pay us our money.

If you can't pay it, then we're going to come in and take your farm, get out of that farm, we'll sell it and get our money back. This is the interest-based, heartless interest-based system.

The Islamic Alternative - Compassion and Sharing

Whereas Islam is based more on sharing our difficulties and then sharing our profits, sharing our successes, you know, or you have what is known as Qard Hassan, you know, the goodly loan, which is an interest-free loan.

People lend and you pay back what you have borrowed. There are also the instruments of Ijara, where the bank is sort of being developed now, purchases something and leases it to somebody who wants to own it. They pay rent or whatever over a period of time and then eventually it can come into their possession.

But in any case, what we're talking about in the end is an alternative to the interest-based system, that there can be found a variety of alternatives. Islamic banking is the most popular one present today and we said it is expanding rapidly. It's something which the West, as we said, in its initial contact rejected, scoffed at.

Islamic Banking in Academia

But today in Harvard University in the United States, you know, one of the top universities in the United States, they have a chair of Islamic banking. They're teaching Islamic banking, they're Islamic finance. There are professors, Western professors who are specialists in it, teaching, you know, Western students, et cetera, because it is a part and parcel of the future.

Islamic economics is a part of the future. And this shows the relevance, again, that we've spoken before of Islam to all aspects of our lives. We're not left in the lurch, left on our own, modern circumstances develop.

What do we do? How do we handle it? Can we handle it? No. Islam provides guidance in all of these various fields of learning, all these various contingencies of life, different new developments taking place. Islam does provide guidance in dealing with these things.

The Timeless Relevance of Islam

So from looking at that, you know, we can see the greatness of Islam, that it is not limited, you know, in the sense of human beings' life, you know, its ideas or whatever are not suitable for contemporary life, because, you

know, oftentimes this is the issue that people raise. How can a system which was developed 1,400 years ago be of relevance today? How? You know, when they look at the other systems, they're totally irrelevant. They don't cover, they cannot handle with modern developments.

However, Islam, being the religion of God, providing guidance for human life in general, and then all of the knowledge of modern science being ultimately from God. By accident, people discover this or the other, but in fact, it's really from God. These things don't necessarily clash at all.

So from the Islamic perspective, there are ways and means of dealing with anything which happens in this life. Islamic banking is only one example of such things. With that, dear viewers, we'd like to thank you for being with us in this segment of our program, in which we have looked at, basically, Islamic banking, banking without interest.

We looked at some of the issues of interest and the harm that it has produced in society. And we looked at the alternative which Islam offers, that of interest-free banking, which is user-friendly, as we say today. You know, it does take into account the needs of human beings.

The Bank and Society Connection

It tries to solve them, resolve their problems, help them, as opposed to milk them, to squeeze them, to take their blood, their sweat, and their tears, to just gobble it up, which is what the interest system does. Islam provides Islamic economics, which we said is opposed to any form of deception. At the same time, it provides a system by which people can get access to capital.

And when they get that access, they will be accessing what is good. Because if a person comes to the bank and says, listen, I've got this plan to build something which is against Islam, the bank will say no. Or they plan to build something which is useless, it's not going to produce anything good, they'll say no.

Or it's not effectively planned out. They'll say, listen, we need some planning, let's get some planners to help you with this project, so and so, it's a good idea in general, but you just haven't planned it properly. So they care whether the people will succeed or not.

So they will share it with them from that perspective. And in that way, the bank and the society are directly linked. It's not like the bank sitting on one end, just trying to milk the society of everything it has.

So Islam is the answer. That's the bottom line. Islam has the answer.

Final Reflections

So dear viewers, I hope that this brief reflection on the issue of banking in Islam, interest, systems, etc., you

know, is of some enlightenment to you. And I hope that, inshallah, you'll continue to follow our programs as we look at some of the other contemporary issues facing the Muslim world today. With that, dear viewers, I now bid you farewell with the Islamic greeting.

Closing

السَّلَامُ عَلَيْكُمْ وَرَحْمَةُ اللَّهِ وَبَرَكَاتُهُ

And may Allah's peace and blessings be on each and every one of you.

السَّلَامُ عَلَيْكُمْ

END OF PROGRAM

May Allah guide us all to implement His laws in our economic dealings and grant us success in this life and the Hereafter.