INDSET MONOGRAPH SERIES ON ISLAM AND QUR'AN No. 24 Riba, Modern and Islamic Banking: A Critique Dr. Nafis Ahmad Siddiqui, Dr. Mohd. Zahir and Mr. Abu Nazim Indian School of Excellence Trust (INDSET) Hyderabad - INDIA ACKNOWLEDGEMENT We would like to express grateful thanks to the following for their kind permission to reproduce the articles published by them. Dr. Shafa’at Ahmad: Riba in Pre-Islamic Arabia (on line -Islamic perspectives.com May 2005). Dr. Imran Ahsan Khan Nyazee: The Rules and Definition of Riba. The Editor, The American Journal of Islamic Social Sciences (AJISS): Islamic Banking and Finance in Theory and Practice-The Experience of Malaysia and Bahrain (AJISS Vol. 22, No. 2, Spring 2005, pp: 70 to 86). The Chief Editor, Hamdard Islamicus: Banking in Islam: Genesis and Development from Historical Perspectives (Hamdard Islamicus, vol. 28, No.2, pp. 45 to 52 April-June 2005). Justice Muhammad Taqi Usmani: The Performance of Islamic Banks-A Realistic Evaluation (published in his book: An Introduction to Islamic Finance, pp.235 to 246, Maktaba Ma’ariful Qur’an, Karachi Pakistan 2002). Ms. Sarah and Seema, daughters of late Syed Hashim Ali for the Articles: Riba and the Credit Needs of the Muslims, published in the Nation and the World, March 16, 2002, New Delhi. Mr. Syed Hamid, former Vice-Chancellor, Aligarh Muslim University, and Chairman of the fortnightly: The Nation and The World for consent to publish Mr. Hashim Ali’s article on Riba published in that periodical. Mr. Omar Malik of the Guidance Financial Group, Washington (D.C.) for providing considerable literature on Islamic Banking. Mr. Kabir Ahmed for giving a final reading to the text before it was sent to the press. Mr. Saeed Siddiqi, who helped us with a copy of the Pakistan Federal Court Judgment of 1991. Chairman-INDSET iii CONTENTS Page Acknowledgement ii Preface : Chairman –INDSET iv INTRODUCTION: Dr. Mohd. Zahir, Mr. Abu Nazim, 1 Dr. Nafis A. Siddiqi & Dr. Shah Manzoor Alam SECTION A – RIBA IN PRE-ISALMIC ARABIA 19 Chapter – 1 : Riba in Pre-Islamic Arabia: Dr. Shafa’at Ahmad 20 SECTION B – RIBA IN QUR’AN AND SUNNAH: CLASSICAL 29 INTERPRETATION Chapter – 2 : Judgment of the Federal Court of Pakistan on Riba 30 (Interest) December 1999: Delivered by Justice Maulana Muhammad Taqi Usmani Chapter – 3 : Rules and Definition of Riba : 153 Dr. Imran Ahsan Khan Nyazee SECTION C – RIBA IN QUR’AN AND SUNNAH: OTHER VIEW 180 POINTS Chapter – 4 : Riba and Credit Needs of the Muslims: 181 Mr. Syed Hashim Ali SECTION D – ISLAMIC BANKING: GENESIS, GROWTH AND 240 CHALLENGES Chapter – 5 : Banking in Islam: Genesis and Development 241 From Historical Perspective: Dr. Dilshad Ara Chapter – 6 : Sharjah Islamic Bank: Operation of an Islamic Bank: 258 Dr. Farrukh Kidwai Chapter – 7 : Islamic Banking and Finance in Theory and Practise – 262 the Experience of Malaysia and Bahrain: Dr. Abdus Samad, Dr. Norman Gardner and Dr. Bradley J. Cook Chapter – 8: Some Observation of the Question of Riba and the 293 Challenges Facing ‘Islamic Banking’: Dr. Ibrahim F.I. Shihata APPENDIX: The Natural Economic Order (Summarised Version): 329 Mr. Sylvio Gesell iv FOREWORD It is a distressing fact that most of the Muslims lack proper understanding about the universal relevance of the Qur'anic Message, which was revealed to Prophet Muhammad (SAWS) for the guidance of all mankind. There is considerable misapprehension too about Islam and the Message of the Qur'an in the minds of Non-Muslims. The Indian School of Excellence Trust (INDSET) is making an humble endeavour through a series of monographs on Islam and Qur'an to project the image of Islam in its proper perspective and to explain the significance of the Qur'anic Message in a scientific and systematic way. This Monograph consists of a collection of essays on Riba (interest) and Islamic banking including also a summary of a landmark judgment, delivered in the Federal Court of Pakistan in December 1999. The Monograph attempts to explain the socio-cultural background in Arabia in which the Qur’anic verses on Riba were revealed. Two distinct schools of thought have emerged as regards the interpretation of Qur’anic verses on Riba. The classical school of thought asserts that Riba or interest per se is prohibited in accordance with Qur’anic injunctions, irrespective of the socio-cultural setting of the Jahiliyyah period in Arabia when the verses were revealed. The concept of interest itself is inherently evil and retards socio- economic development. Some leading western economists such as Sylvio Gesell support their argument. v The other school of thought consists of modern Muslim scholars of Islamic jurisprudence. They argue, equally forcefully, that the Arab Jahiliyyah background, which provided the rationale for the revelation of the Qur’anic verses, cannot be ignored. They point out that during that period borrowing and lending transactions involved individuals and the rates of interest charged were exorbitant (usurious). Modern banking has radically transformed the situation. Firstly, the transactions are between individuals and banks; secondly, the bank charges moderate not exorbitant interest. Further, many of the products of conventional banking are progressive and welfare oriented. Thus all the products of conventional banking are not regressive and cannot be summarily dismissed as usurious. They further point out that the basic purpose of prohibiting Riba, in the Qur’an, is to prevent the enrichment of the rich and exploitation of the poor. Conventional banking can be instrumental in achieving this objective. They do admit that Islamic banking is progressing satisfactorily; nonetheless it operates in a restricted field and cannot fully meet the diverse developmental needs of the society and credit needs of individuals. It has to go a long way before it can compete with conventional banking. It is finally suggested in this Monograph that a group of experts on Islamic jurisprudence, including both classical and modern, should examine critically the products and services of conventional banking. They should use the dynamic Islamic instrument of Ijtihad to arrive at a consensus as to the products and services of conventional vi banking, which contribute to the welfare of the society and also do not violate the fundamental principles of Islamic Shari’ah. This innovative and powerful instrument of Ijtihad or Istinbat should enable these experts to evolve a dynamic system of Islamic finance and banking, which is at once Islamic and contemporary, progressive not regressive, comprehensive not restrictive. Such a radically transformed Islamic finance and banking system, if adopted uniformly by all the Muslim countries, will make it competitive with conventional banking. Its impact on international economy will be far reaching. Will the Organization of Islamic Conference (OIC) and Islamic Development Bank (IDB) step in to accept the challenge so that Islamic finance and banking attains it full potential? We conclude with a prayer to Allah (SWT) to graciously bless our efforts with success (Ameen). Shah Manzoor Alam Chairman-INDSET & Former Vice-Chancellor, University of Kashmir, Srinagar Riba, Modern and Islamic Banking: A Critique 1 INTRODUCTION Dr. Muhammad Zahir, Mr. Abu Nazim & Dr. Shah Manzoor Alam The concept of Riba has generated intense controversy among Muslim scholars and Islamic Jurists. The concept basically calls for interest free economy. The classical Islamic jurists forcefully argue that the concept calls for interest free economy since Riba (interest) has been definitely prohibited according to the injunctions of the Qur’an. Some modern Muslim scholars suggest that Riba should be equated with Usury, which implies exorbitant interest. Further it was prohibited in a particular socio- cultural context on transactions between two individuals and implied the exploitation of the poor by the rich. Hence modern conventional banking cannot be treated on par with monetary transactions between two individuals. Further the rates of interest are moderate and cannot be treated as exorbitant. The Qur’anic verses, therefore, cannot be applied to the current social, cultural and economic environment, which is diametrically different from the socio-cultural situation, which prevailed during the Jahiliyyah period of pre-Islamic Arabia. In view of this conflicting viewpoint the concept of Riba needs to be urgently clarified without any ambiguity. The situation is all the more confusing because none of the Muslim countries have officially introduced interest free banking nor have they taken any position on this important issue. Pakistan is the only Muslim country where its Federal Court has taken a definite position that interest charged or paid in conventional banks is prohibited according to Riba, Modern and Islamic Banking: A Critique 2 1 Qur’anic injunctions and Traditions of the Prophet (SAWS) . The government of Pakistan has not yet implemented this decision because of practical difficulties. It is time that the Organization of Islamic Countries and the Arab League should take initiative and remove the confusion, currently prevailing, about the concept of Riba, and its application in the contemporary socio-economic environment. An attempt has been made in this Monograph to examine the whole issue objectively and in a balanced way. The subject is introduced with an article by Dr. Shafa’at Ahmed, titled 'Riba in Pre-Islamic Arabia'. It provides the historical background in which the verses in the Qur’an on Riba were revealed. He quotes various authorities who explain the meaning of Riba as understood in the days of Jahiliyyah - authorities like Imam Malik, Ibni Jarir, Imam Baghavi, Imam al-Suyuti, Imam Shafi’i and highlights their interpretation on the meaning of the term Riba. This group of scholars is in agreement as to its meaning in the pre-Islamic time: In their view Riba was attracted only when the time of payment was extended. The author also discusses the interpretation of al-Jassas (4th C.AH) whose view on the meaning of the term Riba differs from the previous group of scholars.