In the name of Allah, the Most Merciful, the Most Kind.

Identifying Haraam Elements In Banks, Credit Cards, Insurance & Shares
Syed Rafey Husain

Startup Note: Dear brothers and sisters, this series of articles present Quran for rational minds. In the current era, engineering, medicine, finance & management graduates are tuned to physical sciences and rationality. Besides that present world favors logic which is govern by physical sciences. This article is an effort to bring rational minds closer to message of Quran as they are the intelligentsia & driving force of current world. Once attracted to the sweetness of Quran, they could become source of strength to all Muslims. By following Quran, the guidance from Allah (swt), they could not only make their lives glistening but also help others to understand Quran.

One should remember that only spiritual explanation of Quran cures sick hearts - not the rational study. Rationality merely provides a bridge between physical sciences and great moral teachings of Quran. May Allah help us to understand Quran and give us the right knowledge to spread message of Quran - Ameen.


Introduction:
This document is about Islamic financial concepts and applying them to current banking and financial practices. It consists of following five sections:

  1. Introduction To Financial Spirit Of Islam.
  2. Examples Of Haraam Financial Activities.
  3. Islamic Banking.
  4. Conclusion.
  5. References.

 

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A) Introduction To Financial Spirit Of Islam:
In this section we will present the soul and spirit of Islamic teachings about money related matters. If one does not understand the spirit behind these concepts, he can not identify and save himself from Haraam elements in current economy. We strongly recommend to fully understanding this section before moving to the next section "Examples Of Haraam Financial Activities".

May Allaah help us in understanding the financial spirit of Islam and show us the ways to remove all Haraam elements from our lives. Ameen.

Fundamental Concepts Of Islamic Economy
To clearly understand Islamic ruling on banks, insurance companies, credit cards and other economic entities, one must completely understand three Quranic terms: Riba, Ba’ay and most importantly the Infa’aq.

In the following paragraphs, we will explore the concept of Riba, Ba’ay and Infa’aq. Later, in the next section, we will identify what kind of transactions in current banking, insurance and other financial systems that are not permitted under Islamic law or Shari’ah.

What Is Riba?
Riba is Arabic word which means, "increase" or "excess". 5 Quran used the word "Riba" to prohibit the "increased amount" or the "amount taken in excess" on loans. These days we don’t use the word Riba any more, instead we now call it interest, markup, APR etc.

Interest, markup or APR is identical to Riba because these terms are used for the "increased amount" or "amount taken in excess" on various business transactions. For example, banks take interest on personal and business loans and markup on car or home financing while they charge APR on credit card transactions.

Allaah has made Riba Haraam. So all such transactions which involve interest, markup or APR are Haraam. Allaah says (interpretation of the meaning):

They (those who do not believe in Allaah) say: "Trade is like Riba", but Allah has permitted Trade and forbidden Riba. (al-Baqarah 2:275) 2

Riba – A War With Allah And His Messenger:
Muslims living anywhere in the world should discontinue Riba based transaction all at once and forever. Allaah has used the word "War With Allaah and His Messenger" if one does not stop participating in Riba based transactions. We should ask forgiveness to Allaah for our past associations with Riba, as He is the most compassionate and the most merciful. Allaah warns in the most intense words (interpretation of the meaning):

And if you do not do it (that is do not Stop association with Riba), then take a notice of War from Allaah and His Messenger. (al-Baqarah 2:279) 2

Allaah commands His believers to give up Riba all at once and says (interpretation of the meaning):

O ye who believe! Fear Allah, and give up what remains of your demand for Riba, if ye are indeed believers. (al-Baqarah 2:278) 2

And for those who do not discontinue even after listening and understanding Allaah (swt) commands then those are the companions of the Fire, they will stay therein for ever. Allaah says (interpretation of the meaning):

Those who eat up Riba will not stand except as stand one whom the Evil one by his touch Hath driven to madness… but those who repeat (The offence) are companions of the Fire: They will abide therein (for ever). (al-Baqarah 2:275) 2

Summary Of Riba Concepts:
To summarize concepts of Riba, one must remember:

  1. Amount taken in excess on loans is called Riba and it is Haraam.
  2. Interest, markup or APR etc. are identical to Riba, so they are also Haraam.
  3. Allah has permitted Trade and forbidden Riba.
  4. If one does not stop participating in Riba he is in "War With Allaah and His Messenger" .

What Is Ba’ay? 5
Ba’ay is an Arabic word which means, "trade". Quran used the word "Ba’ay" to permit all kinds of trade. These days we don’t use the word Ba’ay any more, instead we now call it Trade. Trade is a commonly used word for "exchange of goods for money" or "exchange of services for money". Buying car from a car dealer or taking services of computer firm on hourly rate basis are the examples of trade. Allaah has made Trade Halaal and Riba Haraam. Allaah says (interpretation of the meaning):

They (those who do not believe in Allaah) say: "Trade is like Riba," but Allah has permitted Trade and forbidden Riba. Those who after receiving direction from their Lord, discontinue (Riba), shall be forgiven for the past (association with Riba); their case (for the past association with Riba) is for Allah (to judge); but those who repeat (The offence of again participating in Riba based transactions) are companions of the Fire: They will stay therein (for ever). (al-Baqarah 2:275) 2

Three Characteristics Of Ba’ay 5
A trade is always accompanied with three important attributes. If any business deal does not satisfy all three of them then it is not trading or Ba’ay and it is not permitted in Shari’ah:

  1. First Characteristic: In goods trading, the provider of goods charge money because there is a manufacturing cost and efforts involved in selling goods. For example, a car dealer charge money because there is a manufacturing cost and efforts involved in selling a car. In service trading, the provider of services charge money for his specialized knowledge and efforts involved in providing services. For example, a computer firm works on hourly rate because there is a specialized knowledge and efforts involved in writing a computer program. So, as a rule we can say: "It is Haraam to sell or buy anything which is neither a good nor a service". 1 Allaah says:

    2. And do not eat up your property among yourselves for vanities (or unjustly). (al-Baqarah 2:188) 2

  2. Second Characteristic: Both buyer and seller equally share risk involved in any business deal. So in trading, there is no guarantee of success or failure and definite profit or loss for any party. A car dealer or a computer firm can not say it for sure that there business is absolutely loss free. Similarly car buyer or software consumer can not predict definite benefits on their investment. In short, a business deal is a kind of trading if there is no guarantee of success or failure for both parties and they share risk equally. It would be totally unjust if one party bears all the pressure of loss and other enjoys a guaranteed profit. As Allaah is the most just, He made all such unjust and unfair activities Haraam. So, as a rule we can say: "It is Haraam to get involved in any business in which both parties do not share risk equally". 1 Allaah says:

    3. O ye who believe! stand out firmly for justice. (al-Nis’a 4:135) 2

  3. Third Characteristic: In any trading, seller knows his ‘expected profit’ in advance. Similarly, buyer is aware of ‘expected cost’ beforehand. There is no ‘uncertain gain or loss’ involved in trading. For example, a car dealer knows in advance ‘expected profit’ he can obtain from selling a particular model of a car. Similarly, he knows how much he will loose at maximum, if that car does not get sold. In contrast, if ‘uncertain gain or loss’ is involved in any business deal then it is called Gambling. Gambling is not Ba’ay or Trade and Allah has made gambling Haraam. So, as a rule we can say: "It is Haraam to get involved in any business activity that could result indefinite or uncertain gain or loss". 1 Allaah says (interpretation of the meaning):

O ye who believe! Alcohol and Gambling, (dedication of) stones, and (divination by) arrows, are an abomination (wicked and filthy acts),- of Satan's handwork: eschew (that is keep away from) such (evil acts), that ye may prosper. (al-Maa’idah 5:91) 2

How To Find Out If A Business Deal Is Ba’ay? 5
Keeping above three characteristics of trading or Ba’ay in mind, we can say for sure that a business deal is certainly not a trading and it is Haraam in which:

  1. Neither a commodity nor a service is sold.
  2. Parties do not share risk equally, and
  3. It involves uncertain gain or loss.

Is It A Ba’ay, If One Sells "Money"? 5
Banks and other financial institutions trade "money" which work on the basis of interest. We know that trading is Halaal, only if goods or services are sold. Businesses that deal in selling something which is neither a commodity nor a service then it is not trading and it is forbidden.

Bankers sell "money" by giving repayment time to borrowers. But "money is neither a good nor a service". It is something which is "paid in exchange of" goods or services and it can not be sold at the cost of more money.

It is simply meaningless to say "exchange money for more money" because by definition, "exchange of goods or services for money" is called Ba’ay. Banks "sell money" to people in the form of loans, financing or credit cards and charge interest, markup or APR in addition to principal amount. As we have learned from First Characteristic of Ba’ay that It is forbidden to sell or buy anything which is neither a good nor a service. So, selling or buying money is also prohibited. Allaah says:

O ye who believe! Eat not up your property among yourselves in vanities (or unjustly): But let there be amongst you Traffic and Trade by mutual good will: Nor kill (or destroy) yourselves: for verily Allah hath been to you Most Merciful! (al-Nis’a 4:29) 2

Is It A Ba’ay, If One Sells "Duration"? 5
Bankers say, selling money is like "trading" because they are charging interest or markup for the time they give to borrowers. But again, duration is not a commodity or a service which has any manufacturing cost and it does not require specialized skills and efforts to give repayment time to borrowers. Alone, selling duration without doing any efforts or work in that time is not a service.

Again from the First Characteristic of Ba’ay: It is forbidden to sell or buy anything which is neither a good nor a service. So selling or buying duration is also prohibited.

Summary Of Ba’ay Concepts:
To summarize concepts of Ba’ay, one must remember:

  1. Exchange of goods or services for money is called Ba’ay and it is Halaal.
  2. Allah has permitted Ba’ay (Trade) and forbidden Riba.
  3. Both Money and Duration are neither commodity nor service. It is Haraam to sell or buy them.
  4. It is Haraam to sell or buy anything which is neither a good nor a service.
  5. It is Haraam to get involved in any business in which both parties do not share risk equally.
  6. It is Haraam to get involved in any business in which one or expect indefinite or uncertain gain or loss.

What Is Infa’aq? 5
Infa’aq is Arabic word which means, "spend out" or "give away". Allaah used "Infa’aq" hundreds of time in Quran to command Muslims to "spend out in charity" or "give away ones time, money and other belongings in the name of Allaah". One can see the importance of Infa’aq from the number of times it has been used all over the Holy Quran.

The concept of Infa’aq is central to the teachings of Islam and it is the soul of Islamic financial system. Although trade or Ba’ay is Halaal but Islam wants to see its followers spending more and more in the name of Allaah. Allaah asks his believers to spend in His name before the Day comes when charity will be the most important asset but no ones charity is accepted at that Day. Allaah says:

O ye who believe! Spend out of (the bounties) We have provided for you, before the Day comes when no bargaining (Will avail), nor friendship nor intercession. Those who reject Faith they are the wrongdoers. (al-Baqarah 2:254) 2

Purpose Of Infa’aq: 5
Clearly Quran does not want to create a selfish, stingy society where people are busy all the time in trade and greedy about earning more and more profit each day, throughout there live. It is most certainly not the aim of Quran to produce individuals who forget Allaah and life-here-after and fully absorbed in either thinking about new ways of making money or saving their unused wealth in banks, as is the case these days. Allaah says:

Say: "Short is the enjoyment of this world: the Hereafter is the best for those who do right: Never will ye be dealt with unjustly in the very least! (al-Nis’a 4:77) 2

Quran made Ba’ay Halaal, so that people can make necessary money for their families but after that they keep themselves busy in the affairs of Islam and remembrance of Allaah. Allaah says:

They ask thee how much they are to spend (in the name of Allaah); Say: "What is beyond your needs." Thus doth Allah Make clear to you His Signs: In order that ye may consider- (al-Baqarah 2:219) 2

Only those who believe in Allaah and the Day Of Judgement are quick and generous in doing Infa’aq while other criticize and laugh on their act of charity. Infa’aq looks pointless and absurd to those who do not believe that one Day they will meet their creator - Allah. Allaah says:

The life of this world is alluring (or charming) to those who reject faith, and they scoff (or criticize and laugh) at those who believe. But the righteous will be above them on the Day of Resurrection; for Allah bestows (or offer) His abundance (or rewards) without measure on whom He will. (al-Baqarah 2:212) 2

Immense Contrast Between Islamic & Interest Based Loans:
While the interest based economic system charge more interest if borrower is unable to repay principal amount along with markup within a given duration. However, Quran teaches its believers to give away loan in charity if borrower is in any difficulty. It is a huge contrast in mentality and morality. Allaah says:

If the debtor is in a difficulty, grant him time Till it is easy for him to repay. But if ye remit it by way of charity, that is best for you if ye only knew. And fear the Day when ye shall be brought back to Allah. Then shall every soul be paid what it earned, and none shall be dealt with unjustly. (al-Baqarah 2:280-281) 2

One can see that there is huge contrast between the teachings of Islam and current banking and financial systems. One can also appreciate that a revolutionary change with a totally different mindset is required to do Islamic Banking. Islam is the religion of blessings and its teachings are the ways for prosperous society.

Today Muslims are living under the influence of interest based economic system and they have developed a ‘banker’s mentality’. Their faith is verbally strong but in practice, remembrance of Allaah and the Day Of Judgement is not the real driving force in daily affairs of their lives. While most Muslims in theory believe that their worldly life is temporary and life-here-after is the real life. But in practice, they are busy in saving more and more in their bank accounts, which they are going to leave behind, after their death for others to use.

What To Give In Infa’aq: 5
Not only that one should do Infa’aq more and more but also one must give away best things in the name of Allaah. Allaah ask His believers to do Infa’aq in the good ways and says:

O ye who believe! Give of the good things which ye have (honorably) earned, and of the fruits of the earth which We have produced for you, and do not even aim at getting anything which is bad, in order that out of it ye may give away something, when ye yourselves would not receive it except with closed eyes. And know that Allah is Free of all wants, and worthy of all praise. (al-Baqarah 2:267) 2

Allaah warns His believers that it is "Satan (Evil one)" which make us afraid from poverty and ask us to do most shameful act while Allaah promises His bounties and rewards to those who fear Him. Allaah says:

The Evil one threatens you with poverty and bids (or invites) you to conduct unseemly (or indecently). Allah promiseth you His forgiveness and bounties. And Allah careth for all and He knoweth all things. (al-Baqarah 2:268) 2

All Blessings Are In Charity: 5
Muslim is one who seeks blessings of Allaah. Allaah (swt) teaches His believers in very tender words that there is no blessing in Riba and all good lies in charity. Allaah says whatever is in excess to you, give it in charity. Allaah says (interpretation of the meaning):

Allah will deprive (or take away) Riba of all blessing, but will give increase for deeds of charity: For He loveth not creatures ungrateful and wicked. (al-Baqarah 2:276) 2

Summary Of Infa’aq Concepts:
To summarize concepts of Infa’aq, one must remember:

  1. Infa’aq is the supreme concept of Islamic financial system and Islamic Banking.
  2. Quran teaches its believers to give away loan in charity if borrower is in any difficulty.
  3. One must give of best things in the name of Allaah.
  4. Quran teaches us to give away in charity "What is beyond your needs".
  5. Today Muslims are living under the influence of interest based economic system and they have developed a ‘banker’s mentality’. Their faith is verbally strong but in practice, remembrance of Allaah and the Day Of Judgement is not the real driving force in daily affairs of their lives.
  6. All blessings are in charity.

 

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B) Examples Of Haraam Financial Activities:
Now we will look at few examples of forbidden financial activities in detail. It is unfortunate to write that most Muslims fall in these prohibited activities due to unawareness from the teachings of Quran and its ruling about Riba, Ba’ay and Infa’aq.

1. Working In Banks That Deal In RIBA Is Haraam 1
Islam allows only one kind of loan and that is Qard-el-Hassan (literally good loan) in which the lender does not charge any interest or additional amount over the money lent. If leader, and in our case bank, charges any interest or additional amount over the money lent then it is called RIBA and it is "Haraam".

It is not permissible for any Muslim to work in a bank that deals in Riba, even if the work that the Muslim does has nothing to do with Riba. It is because he is helping the employees, who do work with Riba, with what they need. In this way he is participating in the calculation of interest and strengthening Riba based organization. Allaah says (interpretation of the meaning):

Help ye one another in righteousness and piety (or sanctity), but help ye not one another in sin and transgression: fear Allah. for Allah is strict in punishment. (al-Maa’idah 5:2) 2

In Saheeh Muslim and many other places it is narrated that Jaabir (may Allaah be pleased with him) said:

The Messenger of Allaah (peace and blessings of Allaah be upon him) cursed the one who consumes Riba, the one who pays it, the one who writes it down and the two who witness it, and he said, They are all the same. (Saheeh Muslim) 2

There is no section in the Riba-based bank that is exempt from this ruling according to what we know of the pure Shari’ah, because all the bank employees are cooperating in sin and transgression.

We ask Allaah to show us the ways to search for the means to earn Halaal money. Allaah (swt) says to His believers:

And whosoever fears Allaah and keeps his duty to Him, He will make a way for him to get out (from every difficulty). And He will provide him from (sources) he never could imagine. And whosoever puts his trust in Allaah, then He will suffice him. Verily, Allaah will accomplish his purpose. Indeed Allaah has set a measure for all things (al-Talaaq 65:2-3) 2

2. Using credit card is Haraam 1
Using credit card is Haraam, even if one pays the bank within the time limit, so the bank will not charge any interest. It means using credit cards from any bank for example Citi Bank, ABNO AMRO, ASKRI or any other bank is Haraam and it is prohibited.

It is Haraam because firstly, the credit card holder enters into a contract with the bank and this means that he is obliged to pay interest if he delays payment. This is also Haraam, because it is not permissible for a Muslim to commit himself to doing something that Allaah has forbidden. We ask forgiveness from Allaah, as He forgives the most. Allaah says (interpretation of the meaning):

So whosoever receives an admonition (warning) from his Lord and stops eating Riba, shall not be punished for the past; his case is for Allaah (to judge) (al-Baqarah 2:275) 2

Those who obey teachings of Quran, Allaah will reward them and they will live forever in Gardens beneath which river flows. Allaah says (interpretation of the meaning):

But give glad tidings (news) to those who believe and work righteousness, that their portion is Gardens, beneath which rivers flow. (al-Baqarah 2:25) 2

3. Haraam aspects of Buying Company Shares 1
In principle there is nothing wrong with buying or selling shares, but there are few things that all Muslims should watch carefully, such as:

4. Haraam aspects of Car Financing 1
Islam encourages Muslims to invest their money and to become partners in order to share both profits and risks in the business instead of becoming mere ‘creditors’. As stated earlier, Islam permits trading which involves buyer and seller and there are chances of success and failure for both parties. Leaving trading Halaal, Islam prohibits all other kind of transactions which involve guaranteed profit for one party and uncertain profit for the other. Allaah sees this kind of trading unjust and command us to do justice in every aspect of life:

If ye distort (justice) or decline to do justice, verily Allah is well acquainted with all that ye do. (al-Nis’a 4:135) 2

As defined in the Shari'ah, or Islamic law, Islamic finance is based on the belief that the provider of capital and the user of capital should equally share the risk of business ventures, whether those are car financing or home financing or any other business venture.

The concept of equally sharing the risk is central to Islamic finance. Translated into banking terms, car financing is only Halaal if both bank and borrower share risks and the rewards of financing a car. In case of car theft or accident both parties must share the loss.

On the other hand, it is Haraam under Islamic Shari’ah to have an agreement in which borrower has the sole responsibility to bear full loss in case of damage and he must has to repay financed amount to bank.

It is a normal practice in current interest-based commercial banking system, where all the pressure is on the borrower: he must pay back his financed amount along with agreed markup, regardless of the success or failure of his venture. This is not Ba’ay as we noted earlier in the characteristics Ba’ay and it is Haraam under Islamic Shari’ah.

Even if bank shares risk with borrower, new car must be insured comprehensively with any insurance company. As insurance is a kind of gambling, it is also prohibited in Islam. Jews and Christians have designed the current banking and insurance system and they are driving global economy. Allaah says:

That Jews took Riba, though they were forbidden; and that they devoured (or eat up) men's substance (and money) wrongfully;- we have prepared for those among them who reject faith a grievous (and painful) punishment. (al-Nis’a 4:161) 2

It takes firm faith in Allaah and the Day Of Judgement to discontinue Riba and insurance. Allaah says:

Never will the Jews or the Christians be satisfied with thee unless thou follow their form of religion. Say: "The Guidance of Allah,-that is the (only) Guidance." Wert thou to follow their desires after the knowledge which hath reached thee, then wouldst thou find neither Protector nor helper against Allah. (al-Baqarah 2:120) 2

May Allaah show us the ways to quit dealing in Riba in all form and give us strength to struggle for the revival of Islamic economic system. Ameen. See next point below to clearly understand Islamic ruling on Insurance.

5. Any kind of Insurance is Haraam 1
To clarify Islamic point of view about insurance, we take an example of car insurance. Suppose a person takes a comprehensive car insurance policy from any insurance company. Once the insurance agreement is made, insurance company has the full liability to bear all damages and losses while the insurer has no liability other than paying a yearly premium. All such agreements which are not based on equal sharing of risk are unjust and Haraam as we have already mentioned earlier.

Other than not sharing risk equally, car insurance is Haraam due to another reason. When we insure a car, what actually happens is that an insurance company ‘buys risk’ and insurer ‘sells risk’. Risk is not a commodity or service which could be bought or sold and it is not permitted under Islamic Shari’ah.

As a matter of fact, insurance company and insurer are playing a kind of gambling. If car does not get stolen and there is no accident throughout the year then insurance company "wins" by taking the entire yearly premium. On the other hand, if there is some accident or theft then insurer "wins" and claims the insured amount. All such transactions which involve uncertainty, risk or speculation are gambling and gambling is prohibited in Islam. 3 Allaah says (interpretation of the meaning):

O ye who believe! Alcohol and Gambling, (dedication of) stones, and (divination by) arrows, are an abomination (wicked and filthy acts),- of Satan's handwork: eschew (that is keep away from) such (evil acts), that ye may prosper. (al-Maa’idah 5:91) 2

Allaah informs us that Alcohol and Gambling create hate and revenge among you and keep you away from the remembrance of Allaah. Allaah says (interpretation of the meaning):

Satan's plan is (but) to excite enmity and hatred between you, with Alcohol and Gambling, and hinder you from the remembrance of Allah, and from prayer: will ye not then abstain? (al-Maa’idah 5:91) 2

After having such a clear message from Allaah, one who fears Allaah must stop alcohol and gambling at once. Allaah says (interpretation of the meaning):

Obey Allah, and obey the Messenger, and beware (of evil): if ye do turn back, know ye that it is Our Messenger’s duty to proclaim (the message) in the clearest manner. (al Maa’idah 5:92) 2

6. Putting Money in RIBA based banks is Haraam 1
Putting money in Riba-based banks is Haraam and is a major sin. It is not permissible for a Muslim to put his purified money in banks that deals in Riba, even if he does not withdraw accumulated interest in his account.

It is prohibited because he is helping the bank and its employees, who do work in Riba to grow and flourish by using his pure money in Riba based loans and financing. In this way, he is participating in strengthening of interest driven system and institution.

May Allaah keep us safe from participating in all such activities which are forbidden from Allaah. Ameen. Allaah says (interpretation of the meaning):

Help ye one another in righteousness and piety, but help ye not one another in sin and transgression: fear Allah. For Allah is strict in punishment. (al-Maa’idah 5:2) 2

May Allaah give all Muslims a faith and vigilance to withdraw their money from banks once and forever and use it in Riba free businesses or best to give it in charity. Ameen. Allaah says:

They ask thee what they should spend (In charity). Say: Whatever ye spend that is good, is for parents and kindred and orphans and those in want and for wayfarers (or travelers). And whatever ye do that is good, (Allah) knoweth it well. (al-Baqarah 2:215) 2

7. Haraam aspects of Home Financing 1
As mentioned earlier that in Shari'ah or Islamic law, only that trading is allowed where the provider of capital and the user of capital equally shares risk involved in business. This is also true for home financing. In current interest-based banking system, all the pressure is on the borrower. He must pay back his financed amount along with agreed markup, regardless of the success or failure of his venture.

Besides that home financing through interest based banks or financing companies like House Building Finance Corporation is also Haraam. It means one must arrange Riba-free funds before he should purchase home. Allaah clarifies His believers that this life is an exam and says:

Be sure we shall test you with something of fear and hunger, some loss in goods or lives or the fruits (of your toil), but give glad tidings to those who patiently persevere, Who say, when afflicted with calamity: "To Allah We belong, and to Him is our return". (al-Baqarah 2:155-156) 2

May Allaah help all Muslims in need of Riba free funds and teach wealthy Muslims ways to build Riba free financial institutions. Ameen.

 

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C) Islamic Banking: 4
Islamic banking is a new commercial banking concept which is mainly targeted to eliminate Riba from current banking system. But we have to see: do the practices adopted to avoid interest really do their job or is it simply a change of name? It suffices to quote a few authors.

The Economist writes: 4

..... Muslim theoreticians and bankers have between them devised ingenious ways of coping with the interest problem. One is murabaha. The Koran says you cannot borrow $100m from the bank for a year, at 5% interest, to buy the new machinery your factory needs? Fine. You get the bank to buy the machinery for you -- cost, $100m -- and then you buy the stuff from the bank, paying it $105m a year from now. The difference is that the extra $5m is not interest on loan, which the Koran (perhaps) forbids, but your thanks to the bank for the risk it takes of losing money while it is the owner of the machinery: this is honest trading, okay with the Koran. Since with modern communications the bank’s ownership may last about half a second, its risk is not great, but the transaction is pure. It is not surprising that some Muslims uneasily sniff logic-chopping here.

Dr Ghulam Qadir says of practices in Pakistan: 4

Two of the modes of financing prescribed by the State Bank, namely financing through the purchase of client’s property with a buy-back agreement and sale of goods to clients on a mark-up, involved the least risk and were closest to the old interest-based operations. Hence the banks confined their operations mostly to these modes, particularly the former, after changing the simple buy-back agreement (prescribed by the State Bank) to buy-back agreement with a mark-up, as otherwise there was no incentive for them to extend any finances. The banks also reduced their mark-up-based financing, whether through the purchase of client’s property or through the sale of goods to clients, to mere paper work, instead of actual buying of goods (property), taking their possession and then selling (back) to the client. As a result, there was no difference between the mark-up as practiced by the banks and the conventional interest rate, and hence it was judged repugnant to Islam in the recent decision of the Federal Shari’ah court.

As banks are essentially financial institutions and not trading houses, requiring them to undertake trading in the form of buy-back arrangements and sale on mark-up amounts to imposing on them a function for which they are not well equipped. Therefore, banks in Pakistan made such modifications in the prescribed modes which defeated the very purpose of interest-free financing. Furthermore, as these two minimum-risk modes of financing were kept open to banks, they never tried to devise innovative and imaginative modes of financing within the framework of musharakah and mudarba.

Prof. Khurshid Ahmad says: 4

Murabaha (cost-plus financing) and bai’ mu’ajjal (sale with deferred payment) are permitted in the Shari’ah under certain conditions. Technically, it is not a form of financial mediation but a kind of business participation. The Shari’ah assumes that the financier actually buys the goods and then sells them to the client. Unfortunately, the current practice of "buy-back on mark-up" is not in keeping with the conditions on which murabaha or bai’ mu’ajjal are permitted. What is being done is a fictitious deal which ensures a predetermined profit to the bank without actually dealing in goods or sharing any real risk. This is against the letter and spirit of Shari’ah injunctions.

While I would not venture a fatwa, as I do not qualify for that function, yet as a student of economics and Shari’ah I regard this practice of "buy-back on mark-up" very similar to riba and would suggest its discontinuation. I understand that the Council of Islamic Ideology has also expressed a similar opinion.

Dr Hasanuz Zaman is more scathing in his condemnation: 4

It emerges that practically it is impossible for large banks or the banking system to practice the modes like mark-up, bai’ salam, buy-back, murabaha, etc. in a way that fulfils the Shari’ah conditions. But in order to make themselves eligible to a return on their operations, the banks are compelled to play tricks with the letters of the law. They actually do not buy, do not posses, do not actually sell and deliver the goods; but the transition is assumed to have taken place. By signing a number of documents of purchase, sale and transfer they might fulfil a legal requirement but it is by violating the spirit of prohibition.

To sum up, in Dr Hasanuz Zaman’s words: 4

... many techniques that the interest-free banks are practicing are not either in full conformity with the spirit of Shari’ah or practicable in the case of large banks or the entire banking system. Moreover, they have failed to do away with undesirable aspects of interest. Thus, they have retained what an Islamic bank should eliminate.

 

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D) Conclusion:
You must have noticed it require firm faith and guidance from Allaah to live an absolutely riba free life. It is the blessing from Allaah that there are hundreds of thousand of Muslims all around the world who bear all the difficulties and suffering to live riba free live. They thoroughly and completely believe that one Day they have to meet their creator Allaah who will reward them and enter them to the most honorable place where they will live forever. May Allaah give us the firm faith and show us the ways to live a life free from curse of riba. Ameen.

These are the difficult times for Muslims as there is no Islamic state on the face of this world. There is no place on this earth where the political, social and economic teachings of Islam are completely followed. So Muslims have to follow the Quran on there own and have to struggle for the establishment of Islamic state. It is the responsibility of all Muslims to learn Quran and spread it to their relatives, colleagues, friends and other Muslims. The message of Quran is there. No one is compelled to follow it but whosoever does, Allaah has great rewards for him on the Day Of Judgement. Allaah says:

Let there be no compulsion in religion: Truth stands out clear from Error: whoever rejects evil and believes in Allah hath grasped the most trustworthy handhold, that never breaks. And Allah heareth and knoweth all things. (al-Baqarah 2:256) 2

 

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E) References:
Please refer to following references for further studies:

[1] www.islam-qa.com, Islam & Credit Cards, Islam & Interest, Islam & Insurance, Islam & Business Transactions

[2] English Translation Of Quran By Abdullah Yusuf Ali, Urdu Translation Of Quran

[3] The Principles Of Islamic Banking & Its Application in Australia

[4] Islamic Banking

[5] Tafheem-ul-Quran By Sayyid Abul A’la Maududi

[6] Mudaraba-based Investment and Finance

[7] Riba-free Commercial Banking

[8] Interest, Usury, Riba and the Operational Costs of a Bank

 


And Allah is He who has (Full) Knowledge and Wisdom.

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