Islamic Finance

Question:-

Suppose a Muslim wants to buy a house. This is generally considered a good thing to do - provided it can be done without violating Islam. There is a fair amount of information available on the internet about buying a house and staying within the rules. Several sources say that the commonest way to do it is with Ijara.

Here is how the Islamic Bank of Britain defines Ijara:-

"Ijara is a form of leasing. It involves a contract where the bank buys and then leases an item - perhaps a consumer durable, for example - to a customer for a specified rental over a specific period. The duration of the lease, as well as the basis for rental, are set and agreed in advance. Islamic Bank of Britain retains ownership of the item throughout the arrangement and takes back the item at the end."

"Ijara-wa-iktana is similar to Ijara, except that included in the contract is a promise from the customer to buy the equipment at the end of the lease period, at a pre-agreed price. Rentals paid during the period of the lease constitute part of the purchase price. Often, as a result, the final sale will be for a token sum."

I assume that ijara-wa-iktana is what is meant when the other sources said ijara. What concerns me is that a purchase by ijara seems to me to be exactly the same procedure as a purchase by a trust deed up to a few minor details. In both cases the bank puts up the money and collects regular payments from the buyer. The buyer does not hold title to property. In the usual trust deed situation a third party, in my experience usually a title insurance company, is the trustee of a trust that is the actual owner. When the payment period ends the buyer actually gets title to the house.

The rhetoric is different. An American bank will openly discuss how the interest on the capital is used to calculate the monthly payment. The Islamic Bank of Britain doubtless arrives at exactly the same result using exactly the same calculations - but never utters the word "interest" aloud. So far as I am concerned what you call something is unimportant - what matters is the substance and not the name. One does not make pork halal by calling pigs sheep. Or does one? Isn't that what is going on here?

How do Muslims cope with this apparent identity between a thing that is haram and a thing that is not? Other than nomenclature what, of any significance, is different?

Comment:-

According to the Quran:-

"Those who devour usury shall not rise again, save as he rises whom Satan hath paralyzed with a touch; and that is because they say "trade is only like usury," but Allah has made selling (or trade) lawful and usury unlawful; and he to whom the admonition from his Lord has come, if he desists, he can keep his past gains: his matter is in Allah's hands. But whoever returns (to usury) these are the Fellows of the Fire, and they shall dwell therein. Allah has cursed usury, but made charity fruitful, for Allah loves not the ungrateful and faithless." 2:275-276

This shows that people have confused trade with usury either mistakenly or deliberately. They have hypocritically rationalised. But this can be done in both ways - supposing usury to be trade or trade to be usury.

In trade people buy goods for a cost and sell it for a price which is greater than the cost. The difference constitutes their profit which is the reward for their services. The profit is proportional to the value of the service. In usury money is lent and the return is greater by the amount of interest which represents no service. Islam allows investment and this differs from interest in that the investor takes risks and shares the profit and loss in the enterprise. In Usury the interest is taken even when there is a loss.

In order to see the difference consider the conditions in Africa or India, where people find themselves in permanent debt and are virtually enslaved because they have to continually pay interest without being able to pay back the capital. Even in the relatively prosperous West many people have got themselves into a financial mess and lost their homes because of the huge debts they have got into it. It seemed so easy to pay just the interest without considering the accumulated Capital. They sold their future necessities for present gratification of less important desires owing to greed.

Critic:-

Firstly, you completely fail to take inflation into account. At a modest annual inflation rate of 2 percent, thirty years from now $181,136* has the same purchasing power that $100,000 has today. Banks need to charge interest to compensate for that, too.

Another thing you have disregarded is the fact that banks do not get their capital for free, but by borrowing money from depositors with an interest (which is lower than the one they charge when they grant loans).

I'm not entirely sure how and where an Islamic bank gets its assets, if it does not pay interest to its depositors. I very much doubt that many people would deposit money in a bank that does not pay interest on depositions, and for this reason an Islamic bank would need to seek funds from somewhere else.

A while ago I had a discussion about these Islamic banks on another forum, and I got the impression that at least in Britain the total cost of an "Islamic loan" (ijara or whatever) is considerably higher for a debtor than that of a regular mortgage loan. I understood that this was partly because Islamic banks finance their activities by borrowing money with interest from regular banks, which, if true, brilliantly illustrates the absurdity and hypocrisy of the whole enterprise. In sum, prohibition of (equitable) interest is immoral and irrational as well as detrimental to economic development. It is immoral, because it is used to justify thievery: creditors are expected to give out their hard-earned money for free, thus losing money to inflation. It is irrational, among other reasons, because it seems to be based on the superstitious belief that money is somehow completely different from other forms of property. When a Muslim rents an apartment, he has no qualms about paying the rent. But when he loans money from a bank, he suddenly feels he should not pay interest, which is a compensation, or rent, for using someone else's property, just like a rent for an apartment. If Islam was consistent in this, it would be forbidden for Muslims to pay rent for an apartment. Instead, a Muslim would just make a rent contract, move in, refuse to pay anything to the owner, and give back the apartment at the end of the rent period.

It has been claimed that banks that grant loans with interest do not provide any service for the debtors. Huh? Loaning money is not a service? He also argues that banks do not take a risk when they loan money. Wow. Tell that to banks that struggle with bad loans, I'm sure they will be very happy learn that they have not lost any money after all. I don't quite understand what he tries to say, but it seems that he, like many other Muslims, is enamoured with the ideas of Karl Marx, in this case the absurd theory of surplus value.

Finally, prohibition of interest in detrimental to economy, because it discourages the rich from investing their money, and makes it very difficult for the poor to get money in order to buy a house or run a business, etc.

Comment:-

I was not concerned with banks in particular, nor was I speaking about failure to meet obligations - e.g. non repayment of loans. Are you saying that this is considered to be a normal practice which has to be taken into consideration. Islam requires that people should abide by their contracts and agreements and the system is based on this. As for inflation that is the result of usury, the addition of interest to money lent, and other aspects of Western Economics. For instance, the employers want to increase their profits by increasing the price of the products. This reduces the relative value of the wages paid to the employees – they can buy less for what they are paid. They fight back by trying to increase their wages. This increases costs for employers and would reduce profits. So they increase the prices, which reduces the relative value of the wages, of money. And so on.

Nor am I concerned with the theories of Karl Marx but with the instructions in Islam. It is you who are mixing these up and reaching false conclusions. Money is a medium of exchange and is not a commodity to be bought and sold. To do this causes distortion of the Economy.

The Marxist ideas were themselves based on Jewish, Christian and Islamic values. Usury was forbidden long before Marx and his solution "from all according to their ability to all according to their need" comes straight out of the New Testament. Acts 2:44-45 reads:-

"And all that believed were together and had all things common and sold their possessions and goods and parted them to all men as every man had need."

This is the very opposite of Usury where money is taken from those who have need and given to those who have a surplus. The problem with Marxism was it forgot about human autonomy and responsibility, that it the actions were to be based voluntarily according to their faith and understanding. This is so because Religion is concerned with personal spiritual development and not with material progress. When people are forced or conditioned by the State or anyone else then this cannot possibly do them any good at all - on the contrary it reduces them to automata, to machines manipulated by others. However, Islam does not favour Monasticism and withdrawal from the world. For Islam, the world itself provides all the challenges and lessons that are required for spiritual development. This made the big difference between Christianity and Islam. In Christianity a distinction was made between the spiritual and the physical and learning and discipline were confined to small groups of priests and monks in monasteries while the rest of the population was left to itself. In Islam there was no priesthood or monks, learning and religious discipline was the responsibility of every person and there was no dichotomy between the spiritual and the physical. The learned, the Ulema had social responsibility. However, there were advantages as well as disadvantages. There was greater concentration of spiritual effort in Monasteries and there were greater temptations and negative eroding forces in the world.

In so far as Banks provide a service they are entitled to remuneration for that service. They employ people who work in it and they have to be paid. Islam is not against Profit from work.

When a Bank buys houses or other property and sells it on at deferred terms to others, then this can be regarded like any other kind of trade. The price charged is equal to the cost of that property plus the charge for the service.

But I agree that finance has become a very complicated matter in recent years and this has made the question of usury confusing. It was much simpler in the pre-industrial age. Nevertheless, things can be disentagled when the basic principles are kept in mind.

What the Quran says is:-

"Allah has made trade lawful and usury unlawful; ..... Allah has cursed usury, but made charity fruitful, for Allah loves not the ungrateful and faithless." 2:275-276

It is a question of doing what is good.

One system is based on selfishness - on taking and the other is based on commmunalism (not to be confused with communism), on compassion and giving. The two systems are diametrically opposed. One divides the other unites.

My own recommendation would be that Muslim communities set up Community Banks into which they pay all their incomes and from which they withdraw money as the need it. This C-Bank would invest money in various enterprises and businesses, preferably Muslim ones. It would also purchase houses for members of the community and sell it to them on the hire purchase deferred terms scheme.

But Islamic finance would, of course, work best only in the context of a complete Islamic system. This includes the Inheritance Laws and Zakah by which wealth is distributed and the notion of personal responsibility and mutual consultation through which all affairs are to be run.

Associated with the C-Bank, the Muslim community would also set up C-Businesses, C-Factories, C-Enterprises or C-Industries. These would be organised on the basis of mutual consultation, co-operation and partnerships rather than according to employer-employee relationships. That is there would be no wages, but the profits of the Company (income - expenditure) would be distributed among all workers according to value, quality and amount of work done.

The community could also set up C-shops that bought things in bulk according to the needs of the community and according to requests. The information would be sent to the C-Factories. The Economic system would be kept in balance through the co-ordination and co-operation between C-Shop, the C-Industries and the C-Banks. This co-ordination must be done by a controlling body consisting of members of the three C-bodies and must itself be responsible to the National Assembly.

Inflation, besides being an excuse for usury also erodes savings which people need for their retirement. It is a curse that needs to be countered. One way of doing this is to link the value of each unit of money to the total national income which is regarded as fixed. When there is no distinction between wages and profit then the total income of the workers will equal the total price of the goods they produce as well as their capacity to purchase those goods. This will be so even if innovation and increase in efficiency of manufacture causes the price of goods to fall.

The details of the system can, of course, only be worked out in practice when the system is experimentally set up. This will require quality leadership. But it will require people who are Muslim in thought, motive and behaviour.

Critic:-

People fail to repay their loans not only for criminal reasons, but sometimes people fail to meet their obligations for no fault of their own: bankruptcy, unemployment, illness, death, etc. can all lead to a situation where the debtor has no liquidity and the proceeds from the possible collaterals do not cover the creditors' demands, either. When money is loaned, there's always a risk of default (for whatever reason), and that risk affects the interest rate.

Comment:-

You are speaking about Laws that try to overcome some of the evils of usury. Without these laws unemployment, illness and death etc would not make any difference - the money would be extracted from relatives. These Laws encourage usury and its evils. No such laws would be required when there is no Usury.

The fact is that usury is not about risk but about profit from lending money. It is usually a case of taking advantage of people’s needs or greed and it transfers wealth from the poor to the wealthy, enslaves the former to the latter, encourages greed and causes people to sell their futures for present gratification.

Critic:-

One of your ideas that I consider Marxist-influenced is your insistence that the market price of a product consists of actual costs and "a reward for services". While you fail to explain what that reward actually is and how it is determined, I understand that you are advocating a system where all prices are fixed by a central authority and businesses are forbidden to charge (much) "surplus value". In the real world, Muslim or otherwise, the market price is of course as high as the customers are willing to pay.

Comment:-

You have read into my statement implications that are not there and ignored those that are.

I have pointed out that Islam makes the contrast between usury and charity - and between trade and usury. There is no point in you trying to introduce different criteria of judgement. They are rejected.

Islam is the Religion of Truth and sees things in terms of impersonal objective factors rather than subjective opinions. Muslims have to distinguish between objective and subjective Economics. An Economic Theory that would be compatible with Islam would be something as follows:-

We can use the notion of “utility” of work or of goods, services and facilities. There are four factors involved:- (1) The price which people are willing to pay is the sacrifice they are willing to make and this depends on how much satisfaction they will get from the thing. The utility is a balance between sacrifice and satisfaction. (2) The sacrifice made is a ratio between a particular amount and the total resources a person has. One money unit (mu) for a person who has 100 mu has greater value than for a person who has 1000 mu. The same is true about the satisfaction. (3) Sacrifice and satisfaction are inter-dependent. The sacrifice made in terms of resources (materials, energy, order) or satisfactions produces depletion which creates needs that have to be satisfied. Conversely, satisfaction provides resources which can be sacrificed. (4) Human beings are inter-dependent with their environment. Human Economics which depends to a large extent on the Financial System has to be integrated with the Ecological system, the balance of nature.

The whole of Economics is about maximising the amount of satisfaction per unit of sacrifice and minimising the amount of sacrifice per unit of satisfaction, i.e. of increasing utility. Profit must refer to the increase of utility. Money is a means of exchange and measures the relationship between satisfaction and sacrifice, i.e. relative utility. If it is treated as a commodity, that can itself be bought and sold, this is an illusion that distorts the financial and economic system.

But the perceived sacrifice or satisfaction might be illusions which do not correspond to real sacrifice or satisfaction and this leads to malfunctions, distortion, suffering, degeneration, disease. Conversely, real welfare and development, real Profit requires knowledge of real sacrifice and satisfaction. We must, therefore, distinguish between Apparent and Real Sacrifice and between Apparent and Real Satisfaction. It is not difficult to see that the whole of the Islam is about these distinctions - between real needs and values on the one hand and mere desires, greed, habits, addictions, compulsions, attachments on the other. The establishment of Real Economics is a question of education and not of compulsion as this obviously is a case of negative satisfaction, the sacrifice of welfare.

Critic:-

In general terms, I feel that the way Islam is portrayed nowadays often exhibits greater similarity to Marxism than to how Islam was portrayed and practised in earlier times. For example, today many Muslims assert that Islam promotes absolutely equality of all people, yet historically the presence of often stark hierarchies in Muslim societies were not questioned. Remember that there never was an indigenous Islamic movement to abolish slavery; if it weren't for Western colonialists and their drive to abolish slavery, in all probability slavery would still be wide-spread in Muslim countries.

Comment:-

You continue to make three mistake:- (1) Because a system S1 (Marxism) has elements a, b, c, d, e, f and another system S2 (Islam) has elements f, g, h, i ,j then because they both have element f in common, therefore system S1 is the same as S2. (2) You confuse the teachings of Islam with the people who might or might not understand or practice Islam to various degrees. (3) You confuse the teaching about principles, truths and ideals with historical events. Human beings are required to move towards the ideal though they are affected and diverted by worldly, material non-ideal forces.

Critic:-

In another article you absurdly and hilariously claim that America was founded on Masonic principles, influenced by Islam. In reality, of course, the United States was founded on the ideals of the Enlightenment tempered by Christian morality and Anglo-Saxon political heritage. This applies to its culture but also to its economic and financial institutions which made it great.

Comment:-

It is true that the Economic and Financial institutions of the USA are integral to the rest of the US culture, its social, ideological and psychological state and that it is a cause of its wealth, which also made possible much of its other achievements in science, technology, organisation and education. But it is also evident that it has created a great many environmental, social and psychological problems and that it has enslaved, impoverished, a devastated and caused misery to many other nations of the World.

Islamic Finance is also integral to the whole Islamic Way of Life, but it is a deliberate consciously constructed system as opposed to one that has arisen accidentally, uncontrolled through intelligence.

Your hilarity is based on ignorance. The regime set up in the USA was quite unlike those of the countries in Europe which was Christian and from which the US citizens mainly came. Ideologically Europe was most certainly transformed by influences that came from Islam. That is what caused it to come out of the Dark ages into Enlightenment. That also sparked the Renaissance and the Reformation. Many of the Founding fathers of the USA were Freemasons and Freemasonry was affected by Jewish, Christian and Islamic ideas.

I do not discount the influence of Christianity - Christianity is the Religion of love - the fact that Love, charity and compassion are its basic teachings. But Christians did not show much of that in the past. What you call Christian morality is the same as the Islamic one and it might well be the case that Christians rediscovered their own roots as a result of Islamic influences.

But apart from this Islam is the religion of Truth and puts emphasis on objectivity, knowledge and awareness. This is what informs science and certainly the progress of the USA depends on Science. But note that as Science and technology progressed, Christianity declined. The present civilisation in the USA is NOT a Christian one.

The US was also heavily influenced by Capitalism based on USURY which derives from the fact that many Jews who had been persecuted and restricted could only make a living from interest by lending money. This is obviously a perversion of the Jewish Law.

The US was also influenced by Greek civilisation based on unfettered speculation, guesswork, fantasy, Art, sport, games, pastimes and frivolities, non-essentials of doubtful value that only those could indulge in who have slaves that do all the necessary practical work. It was also affected by Roman civilisation from which came a formal law, machine like organisation, violence, and self-indulgent depravities. Christianity, despite Jesus' instructions abandoned the Hebrew Law of the Old Testament and had to adopt the Roman Law under Constantine which was made mainly to control slaves and conquered peoples.

But the USA was also lucky in having a new environment, vast space and great resources, and a relatively small population free from the control of monarchs and old traditions that allowed new experiments and thought. And above all it benefited from an influx of the more vigorous, adventurous and enterprising people and the vitalising affect of a mixing of cultures, ideas and genes, and the continuing brain drain from all over the world. Similar conditions existed for early Islam as it expanded but eventually ran out. They are running out also for the USA.

But you cannot possibly claim that everything in the USA arose spontaneously without causes or that everything in it is ideal and not a mixture of good and evil. Constant rethinking and conscious reformation are always required for real progress towards an ideal otherwise stagnation and degeneration inevitably set in.

I am interested in what Islam teaches rather than what people do or what the present conditions are like or their environmental, historical or psychological causes, except in so far as they affect the implementation of those teachings. This is because I see that if the Islamic system was to be established it would filter out the corrupt from the good and useful and create a much better world conducive to human welfare and development.

Critic:-

I was speaking about the realities of finance.

Comment:-

I was speaking about values. Diseases are also realities and we want to get rid of these realities.

The fact is that usury is not about risk at all but about profit from lending. It is usually a case of taking advantage of peoples needs and it transfers wealth from the poor to the wealth and enslaves the former to the latter.

Critic:-

This statement of yours does not reflect reality. All businesses are about profit and about taking advantage of people's needs.

Marx predicted that the "capitalists" would get richer and richer, and the "proletariat" poorer and poorer. I wonder if anyone has ever been more wrong?

Comment:-

No, proper legitimate business is about fair exchange. It has to do with Justice.

A feature of some Western business practices is to take advantage of the weaknesses of others, their ignorance, inexperience, mental deficiency, disease or adverse circumstances but in Islam to do so would be regarded as criminal activity and prosecuted.

Marx was right. The difference between the rich and poor is, indeed, increasing. This is counteracted to some extent by government legislation and Trade Union action which has nothing to do with Usury itself. But this counter action is usually confined to within some nations. On the international scale it remains a fact that the poor are getting poorer creating numerous political problems. Why, otherwise would it be necessary to cancel the debts of these nations?

But apart from all this, it remains a fact that Islam distinguishes usury from trade and charity and prefers charity however non-Muslims might protest or try to rationalise it away.

Critic:-

Your claim that Islam emphasizes truth is another empty assertion. Every religion claims to be the religion of truth and to advocate all kinds of nice things.

Comment:-

You are mistaken again. It is the Quran itself that tells us that it is the religion of Truth and the Truth is emphasized throughout the Quran. Muslims are required to seek Truth and abide by it.

As for your ignorance about the causes of the factors that created the USA, I know that people conditioned by illusions and hypnotised by propaganda over a long period are not able to accept alternative view points.

Critic:-

You say you are interested in what Islam teaches. I do not believe in such utopian scenarios. The biggest obstacle for me to believe in your ideas is that you can not point me to a society where those ideas have been successfully put into practice.

Comment:-

What luck that there are people who are NOT as narrow minded as you, otherwise there would never have been any progress - no one would have implemented any ideas or ideals at all.

Critic:-

You mention fair exchange. This is possible only in a well developed capitalist environment.

Comment:-

I believe that Capitalism is a morally unjustifiable system which justifies and propagates much criminal activity and injustice. It is not compatible with humanitarian and non-materialistic values. It requires much reformation. This is understood by many people. Communism and Socialism were meant as rectifications but they made their own mistakes besides being sabotaged by Capitalists. Nevertheless much modification of the Capitalist system has already taken place by means of many laws that restrict it or deal with its evil effects. There is a synthesis of Capitalism and Socialism to various degrees in most countries against the opposition of those, as in any other system, who are mentally conditioned by the old order. But much more is required.

I have told you what Islam teaches and my opinions based on it. You either understand or not. You can accept or reject them as you like. It makes no difference to the facts.

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