The Doctrine of Riba in the Working Contemporary World: Is Papers in Islamic Finance the Answer? Responsible Banking & By Pejman Abedifar Finance

Abstract: This paper re-examines the doctrine of Riba and attempts to reconcile it with the contemporary world. I argue that conventional banking and finance practised in formal markets is not against Islamic principles so long as it operates on the basis of justice and does not treat the poor and the needy in an opportunistic manner. The WP Nº 16-002 doctrines of Riba and Infaq (charity) are inextricably linked and must therefore be considered together. The latter st emphasizes helping the poor and the former prevents 1 Quarter 2016 extracting rent from their need. -based lending was merely an instance in the medieval era, and the exploitation of the poor can occur in different forms within different landscapes. The Doctrine of Ribain the Contemporary World: Is Islamic Finance the Answer?

P ejmanA bed ifar School of Management, University of St Andrews, UK Email: [email protected]

ThisD raft:November14,2015

Abstract. Thispaper re-examines the d octrine of Riba and attemptstoreconcileitwiththe contemporaryworld.Iargue thatconventionalbankingand finance practised informalmarkets isnotagainstIslamicprinciples so longasitoperates on the basisof justice and d oes nottreat the poorand the need y inanopportunisticmanner.The d octrines of Riba and Infaq (charity)are inextricablylinked and mu sttherefore be considered together.The latteremphasizes helpingthe poorand the formerpreventsextractingrentfrom theirneed .Interest-based lendingwasmerely aninstance inthe med ievalera,and the exploitation of the poorcanoccu rind ifferentforms withind ifferentlandscapes.

JEL Classifications:G00,G21,P00,Z12

Keywords:IslamicFinance,Riba,Infaq,Religion,EconomicSystem

Acknowledgement:Iwou ld like togratefu llythankP hilipM olyneu x forhishelpfu lcommentson the paper.A ny remainingerrorsared u e tomy negligence.

1 1. Introduction

Since itsmoderninception in197 5,Islamicfinance hasevolved and grown rapidlyall over the world.Ithasbeen experiencing d ou ble-digitgrowthover recentyears(The B anker,

2013;Islamic FinancialServices B oard,2015).A ssetsmanaged u nder Islamic finance are estimated toexceed $1.9trillionin2014 (IslamicFinancialServices B oard,2015).A cademiahas extensivelyadd ressed thisphenomenon1 and examined d ifferentfeatures of -compliant modes of finance based on Islamic scholars’interpretation of religiou s sou rces and modern finance.Thispaper attemptstore-examine su ch perceptions and reconcileIslamicprinciples withmoderneconomicsystems.

D evou tM u slims and religiou s peopleingeneralface ad ilemmaintheird ailylife:they mu stfu lfilthe willof God revealed many centuries ago intheircontemporary lives with completelyd ifferentland scapes.One of the d ilemmasrelates tothe prohibition of Riba (asthe paymentorreceiptof Ribaisregarded asone of the worstsins inthe holyQ u r’an),whereas technologicaladvances and d evelopmentof conventionalfinancialsystems necessitateengaging withfinancialtransactions.N owadays on the one hand,peopleliveindividu allyinbigcities, ratherthanbeing clanmembersinsmallcommu nities;onthe otherhand,exploiting economies of scalerequ ires huge savings,mobilization and assetallocation atarelativelylong d istance.

Thisd ictates the establishmentof aformalfinancialsystem operatingon animpersonalbasisto cope withthe associated asymmetricinformation problems (moralhazard and adverse selection) linked tofinancialintermed iationinthe contemporaryworld.

To add ress the increasinglyimportantnecessityof formalfinancialservice providers,

Islamicscholarsinvented anew form of finance and bankingon the basisof Islamicrules on transactions,Figh al-,which intheiropinion complies withIslamicprinciples and

1 P lease refertoA bed ifaretal.(2015a)foroverview ofempiricalstud ies onIslamicfinance. 2 rules (Sharia),specificallythe illicitness of Riba.Infactthey have notestablished amechanism foreffectingthe d octrine of Riba,instead they haveattempted tomake the contemporaryfinance and bankinglegitimateforM u slims.A s su ch,althou ghthe holyQ u r’ancontrasts Riba and Infaq

(charity),they havemerelyfocu sed onhow toavoid Riba withou tpayingenou ghattentiontothe emphasison Infaq and helpingthe poorand the need y.

Islamicfinance haspromoted financialinclusion,because manyM u slims preferfinancial produ ctsand services thatcomplywiththeirreligiou s belief (Frankfu rtSchoolof Finance and

M anagement,2006;C .G.A.P.,2008 ;A bed ifar,etal.2015b).H owever,and d espite itsfast growthd u ring the lastd ecade,ithas been criticized by severalscholars (El-Gamal2006;

H amou d i,2007 amongothers),asamethod tocircu mventthe prohibition of Riba,seekingthe same objectiveasconventionalfinance.Ishare thisview and argue thatthisisbecause Islamic juristshave adopted a purelyformalistic approach for fu lfilling the willof God and have regarded the holyQ u r’anasalawtextbook.Treatmentofd efaultpenaltyisanexcellentexample ofthisformalisticapproach.W hilealmostallIslamicjuristsagree thatitisillicitasan“obviou s”

Riba,Islamicbanksattempttotake itinone wayoranother.Increasingthe mark-uprateatthe firstinstance and giving the excess back incase of timelyrepaymentisone of the popular methods forbypassingthe prohibition.

Islamic banking and finance have almost similarobjectives as theirconventional cou nterpartsd o,bu ttheyfollow d ifferentformalities toachieve theirgoals.The mainqu estionis, then,whetherd evou tM u slims mu stcarryou ttheirfinancialtransactions inaweird form and u ndercomplicated mechanisms toshow thatthey obey the willof God.Thispaperattemptsto shed lighton thisissu e and explore how we canfu lfilthe d octrine of Riba inthe contemporary world.

3 The review ofthe holyQ u r’anshows thatitcondemns Riba bu tencou rages Infaq instead.

H owever,these canonlybe two sides ofone coin.B elieversmu sttreatthe poorand the need yas an instance for charityrather than an opportunityfor making profitfrom theirneed s.The mainstream perceptions of Islamic jurists of d ifferent schools of thou ght su ggest that classification of some types of trades as Riba by the P rophetM u hammad (P.B.U.H.)was probablyaprophylacticruletopreventcircu mventingthe prohibition of Riba.Inmy opinion, however,Islamicscholars merelyfocu s on formalisticallyobserving the P ropheticinjunction againstRiba intrade and have u sed the same mechanism tod esignIslamicfinance;whereasthe mainobjectiveof the d octrine of Riba,whichishelpingthe poorand treatingthem on the basis ofjustice hasbeen thorou ghlyneglected .

Thispaperalso examines the criticisms brou ghtu pbyproponentsofIslamicbankingand finance againstconventionalfinance and claims thatthey are invalid or notapplicable.Y et conventionalbanking and finance practised informalfinancialsystems isnotagainstthe d octrine of Riba so longasitisfu lfilled on the basisof justice and d oes notconsiderthe poor and the need y as a profit-making opportunity.H owever,ininformalfinancialmarketsand amongindividu alswithmore orless completeinformation abou teachother,e.g.insocietywith relativelylowerlevelof individu alism2,equ itycontractscanbetterserve the purpose of justice.

The d octrine of Riba isbroaderthanlending,and mu stbe considered togetherwiththe d octrine of Infaq in one package.The latter encou rages helping the poor,and the former bans expropriating them.Interest-based lending was merelyaninstance inthe med ievalera,so it shou ld be possibletosetu p a frameworkforfu lfilling the d octrines of Riba and Infaq ina moderneconomicsetting.The firststepistoestablishanefficientsocialsecu ritysystem by a

2 P lease refertoH ofsted e (2001)foroverview ofcu lturaldimensionstheory. 4 transparent,efficientand accou ntablegovernmentinordertoprovide the poorand the need y withequ alrightsand the necessitytoflou rish.

The remainderof the paperisorganized asfollows.Section 2 elaborates the d octrine of

Riba,section 3 d escribes Riba incommerciallending,section 4 presentsthe mainstream Islamic scholars’perception,section5d iscu sses the criticisms ofthe mainstreamIslamicfinance,section

6 examines fallacies of Riba incommerciallend ing,and section 7 proposes implications forthe d octrine of Riba inthe contemporaryworld.Finally,section8 conclud es.

2. The Doctrine of Riba

2.1.B A C KGRO UN D

The history of interest-based lending can be traced back to5000 B C ,as a common practice inprehistoricsociety(Johnson,2009).A brahamicreligions,however,forbidintereston loans and encou rage peopletolend toeachotherfree of charge. “Ribbit”,“”and “Riba” are the correspondingterms inJud aism,C hristianityand ,respectively.InM odernH ebrew takingRibbit isone of the worstsins3.The motivation forthe strongprohibition of interestisto preventthe oppression of the poorand exploitingthem because of theirneed s.A s su ch,even

Exodu s prohibitscertainitems,e.g.garment,asasecu rityforloans (Blacketal.1962).To fu lfil the requ irement of the Jewish law (“Halacha”)and avoid interest lending,Jewish jurists

(“Rabbis”)recommend partnershipagreements(“Heter Ishka”)where one partyprovides fu nds and the other provides entrepreneu rialskills4.M oreover,interest-free loans (“Gemach”)are encou raged and established 5.A nu mberofjuristsexclud e conventionalbankingasanecessityfor

3 H olyH ebrew B ible,Exod u s,22:24,Leviticu s 25:36-37 and D eu teronomy,23:20-21. 4 http://www.jlaw.com/Articles/heter1.html. 5 Forinformationabou tthe mechanism please referto:http://www.freeloan.org 5 economic activities from the d octrine of Ribbit;nevertheless,they advise individu alsand hou seholds toconsiderbanksasthe lenderoflastresort6.

Usury inlending wasinitiallyprohibited among C hristians7 ;however,later on inthe confrontation of the scripturalindu ction and the necessityof finance,the formerwassetaside and Usury became lawfu l(Eisenstein,2011).Forinstance KingH enryV IIIof England in1545 made Usury legalby d ecreeingaparadoxicalactcalled “the Act Against Usury”.M artinL u ther and JohnC alvin,the leadingP rotestantreformers,inthe sixteenthcenturylegitimated low-rate

(4-5%) Usury (Graeber,2011;H omer,2005).In Roman C atholicism,P ope P ius V III,the

Inqu isitionofRome,weakened the banon Usury in18 30 byd ecreeingthatconfessorsshou ldno longer d isturb those who lentatlegalinterestrates,e.g.5% inFrance (L evillain,2002).

Eventually,in1917 ,the C ode of C annon L aw allowed churches tomake interest-bearing investmentsatthe legalrate(B ou scaren and Ellis,1957 ).

Islamicjuristsadopted a d ifferentstrategy toconfrontthe d ilemma.They d esigned a mechanism called “Islamicfinance”toadd ress boththe d octrine of Riba and the need forfinance whichisthe focu s ofthispaper.

2.2.RIBA V ERSUS INFAQ (RIBA IN L EN D ING)

Inthe holyQ u r’anthere isaconsiderableemphasison helpingthe poorand the need y in d ifferentforms of charity, and Qard al-Hasan (collectivelycalled “Infaq”).Infact,Infaq isone of the mainpillars of Islam and the mostimportantd u tyof M u slims after prayer

6 http://connection.ebscohost.com/c/articles/90536401/rabbi-ariel-banks-are-last-place-borrow-money-from 7 SirH arryP age ‘InRestraintof Usu ry:The L endingof M oney atInterest’C hartered InstituteforP u blicFinances and A ccou nts(CIPFA ),Lond on,198 5. 6 (“Salaat” )8 .The holyQ u r’anencou rages M u slims to Infaq and emphasizes thathelpingthe poor for the sake of God ishighlyvalued and isa pre-requ isite for attaining righteou sness (e.g. chapter3,verse 92;chapter2:17 7 ).A ppendix(1)provides anu mberof su ch verses.Knowing thatitisd ifficu ltforhumanbeingstoscarifytheirown u tilityforthe sake ofothers,God inspires believerstotake participatein Infaq inone wayoranother,e.g.purify you rproperties by Infaq

(chapter9:103);God willreward you (chapter2:262,27 2,27 4;chapter57 :7;chapter7 3:20);H e wou ld mu ltiplythe reward (chapter 2:245,261;chapter 64:17 );the reward willnotperish

(chapter35:29);Infaq willkeepyou awayfrom H ell(chapter7 0:15-25).

Inthiscontext,aperson whoconsidersthe financialneed of the poorasaprofit-making lendingopportunityratherthanareligiou s obligation indeed attemptstoenervatethe orderof

God and d iscou rage believersfrom observingone of the mainprinciples of Islam.A s su ch,the holyQ u r’anconsiderstakingRiba asone of the worstsins and establishingawaragainstGod and H isP rophet(chapter2:27 9).A ppendix(2)highlightsanu mberof the holyQ u r’an’sverses which condemn Riba.Inchapter3,verses 130-134,believersare advised nottotake Riba to avoid H ell,whereasparadise ispromised tothose whoobey God and H isM essengerand help the poor.The verse 39 of chapter30 pointsou tthatInfaq contraryto Riba willbe increased and mu ltiplied byGod.

Inchapter 2 also,Riba isd iscu ssed againstcharity(i.e.verses 261-27 4 elaborate the importance of charityand verses 27 5-28 0 cond emn Riba).God willprosper from charitable d eed s and willnotbless Riba (verse 27 6).B elieversare encou raged tod onate asone of the criteriaforobtainingthe blessingof God (verse 27 7 ).B elieversmu stnottake Riba,otherwise they willbe atwarwithGod and the M essenger(verses 27 8 and 27 9).Those whostoptaking

8 Inatleast27 verses,Infaq follows Salaat:C hapter2:verses 3,43,8 3,110,17 7 ,27 7 ;chapter4:77 ,162;chapter 5:12,55;chapter8 :3;chapter9:5,11,18 ,54,71;chapter13:22;chapter19:31,55;chapter21:73;chapter22:35,41, 7 8 ;chapter24:37 ,56;chapter35:29;chapter42:38 . 7 Riba willbe treated fairly;they wou ldhavetheircapital;neitherthey nord ebtorswillsu fferloss

(verse 27 9).Ifborrowerscannotrepayon time,lendersmu stgivethem time and itwou ld be betteriflendersforgaved ebt(verse 28 0).

Inthe verse 27 5 of chapter 2,the flawed argumentof those who take Riba hasbeen raised :they (mistakenly)claimthat“trade isthe same as Riba” .Ind eed ,similartobu sinessmen who seek tomake profit,they spotan opportunityinthe need of the poor and d esire to expropriatesome rentfrom them;whereasthe holyQ u r’anemphasizes thatbelieversshou ldtreat the need of the poor as an opportunityfor Infaq.H ence,while trading isallowed ,Riba is forbidd en.Inotherwords,believersmu stforgo Riba and d onateinstead;they mu ststoptaking

Riba tosave themselves from punishmenton the D ayof Jud gment,and reward willbe given to those whohelpthe poor.

2.3.RIBA IN TRA D E

Riba inthe holyQ u r’anisprohibited inconnection withsettlementof d ebtsand lending.

H owever,in Hadiths9,the same terminology isu sed toelaborate some (forbidd en by

Sharia)terms inbu siness.Inthissection,Ireview d efinitionof Riba intrade u ndermajorIslamic schools10:

9 A (ProphetM u hammad’ssaying)canbe considered bindingifitisnotincontrarywiththe holyQ u r’an, beingauthentic(Sahih)inasense thatallthe chains (reporters)identified ashonestnarrators,beingexplicitand clear.M oreover,forfu ndamentalissu es aHadith mu stbe reported throu ghd ifferentchannels(Mutawatir)(Shahid Thani,1558 ;Farooq,2009). 10 There are fou r main Sunni schools,i.e., Shafi’i, and ,and one main Shia school,i.e. Shia.Sunni M u slims consider the wording of the companion as the channel to Sunnat (Prophet M u hammad’su tterance and wayof life)asthe second sou rce -alongside of the holyQ u r’an–forreligiou s thou ght and guidelines,whereas Shia M u slims considerthe narration of A liibn A biTalib(the P rophet’scou sinand son-in- law)and hissonsasthe rou te(Tabatabai,197 9). 8 2.3.a. SUNNI SCHOOLS OF THOUGHT

A ccordingto Sunni juristswe havetwo types of Riba intrade:

2.3.a.i. Riba of Excess (Riba Al-Fadl)

Riba of excess occu rsinspottransactions when aprodu ctisexchanged forthe same type of produ ctbu twithd ifferentqu antity(Ibn Ru shd,1997 ),e.g.one kilogram of highqu alityd ates against three kilograms of low qu ality ones.Itis forbidd en by major Sunni schools of jurisprud ence on the basisof aHadith attribu ted tothe P rophetM u hammad.The Hanafi jurists believe thatRiba of excess isapplicabletoitems soldby eitherweightorvolume (Saleh,198 6;

IbnRu shd,1997 ).The Shafi Schoolconsidersalltypes offood,goldand silverasthe purpose of thisrule(Saleh,198 6;Ibn Ru shd,1997 ).The Malikis limitthe ruletoonlynon-perishablebasic foods,goldand silver(Saleh,198 6).

The mainrationale ispreventing circu mvention of the prohibition of Riba,i.e.itis prohibited asameans toanend (Rd ia,197 0;A l-Zu hayli,2003).Ibn Q ayyimal-Jawziyyacalls thistype of Riba as“su btle”Riba thatisprohibited because itcanlead to“obviou s”Riba (Al-

Sanhuri,1953).M arketsu pervision,transparency and stabilityforfaird istribu tion of goods and avoidinginjustice and mispriced transactionsaresome otherexplanationsforthisruletakinginto accou ntthe scarcityand importance of some of the goods inthe eraof the P rophet(Ibn Ru shd,

1997 ;A l-Hu mam,2004;El-Gamal,2006;Fadel,2008 ).

2.3.a.ii. Riba of Delay (Riba Al-Nasi’ah)

Riba of delay occu rsind eferred transactions when certaincommodities are exchanged forthe same type of prod u ctseven ifthe cou nter-values are the same,e.g.tradingone kilogram of goldforone kilogram of goldtobe exchanged some time infu ture.Itisforbidd en by major

Sunni Islamicschoolson the basisof aHadith attribu ted tothe P rophetM u hammad.A ccording to Malikis and Shafi’is, d eferred trade of foodstuffs and also goldand silverisprohibited bythe 9 principleof Riba of delay.The d eferred trade of other commodities isallowed u nder certain conditions.Forthe ,deferred transactions of commodities sold by weightorvolume is allowed ifthey are traded againstgold,silver,coppercoins oragood notsold by volume or weight(Saleh,198 6)11.

A few jurists(e.g.Ibn Q ayyimal-Jawziyyaand Ibn Ru shd)believe thatRiba of delay is prohibited as“obviou s”Riba (Al-Sanhuri,1953);whereasothers (e.g.Rida)believe thatthe prohibition hasbeen taken place asaprophylacticruleand classify Riba of delay as“su btle”

Riba.A l-Zu hayli(2003)believes thatRiba of delay isprohibited toavoid exploitation of the need y by the richand (food)marketinstability.A l-Sanhuri(1953)claims thatsimilarto Riba of excess,Riba of delay isnotexplicitlymentioned inthe holyQ u r’an(contraryto pre-Islamic

Riba12)and hence we shou ldtreatbothinasimilarmanner.H e also proposes the same rationale forprohibition of bothRiba of excess and Riba of delay (i.e.toavoidmispriced transactions and marketinstability)and classify them as“su btle”Riba.Hanbali Schoolalso considersthe pre-

Islamic Riba asthe only“obviou s”Riba (Ibn Q ayyimal-Jawziyyah,197 3).Regarding Riba of excess and Riba of delay,however,differentviews have been attribu ted to Hanbali schoolof thou ght.The firstview isclose to Hanafis,whilethe second view issimilarto Shafi’is and

Malikis (Obaidu llah,1999).

El-Gamal(2006)argues thatthe policyobjectiveofthisruleistoavoidu nbu ndled saleof cred it,because the prohibition requ ires thatcred itbe granted forthe purchase ofaspecificasset, and tradersmu stestablish the interestrate on the basisof the fu ture value of the u nderlying assets.Fadel(2008 )castsd ou bton the price-settingpolicy of both Riba of excess and Riba of

11 P lease refertoFadel(2008 )forad etailed d iscu ssionon Riba of excess and Riba of delay. 12 D u ringthe pre-Islamicperiod ,itwasacommon practice tod emand foranincrease ifd ebtorswerenotabletopay theird ebttocred itors on maturityd ate.In su ch circu mstances,the repaymenthad been d eferred by cred itors conditionalonanincrease ond ebt.Thistype of Riba isalsocalled “obviou s”Riba. 10 delay because the prohibitioncanbe bypassed throu ghengagingintwo trades instead ofone.H e argues thatexistingIslamiclawcannotprovide aconvincingargumentforprohibition of these two types of Riba.H e claims thatthe overlapbetween the goods thatare su bjecttobothZakat and Riba (Riba of excess and delay)su ggeststhatthe policy objectiveisprice-setting and is relevantintou gheconomictimes toprotectconsu mersu nderthe wealth-red istribu tion system of

Zakat.

2.3.b. SHIA SCHOOL OF THOUGHT

Shia juristsd efine one typeof Riba intrade called ‘Riba in Exchange’or‘Riba Moameli’.

Itoccu rsintransactions when aprodu ctisexchanged forthe same type of produ ctbu twith d ifferentqu antity,e.g.one kilogram of highqu alityd ates againstthree kilograms of low qu ality one.Itisforbidd en by majorShia jurists.The prohibition isonlyapplicabletogoods thatare traded byeitherweightorvolume.Itisclassified as“subtle”Riba and the prohibitionismade as apreventativemeasu re(Bojnordi,2010).

3. Ribain Commercial Lending

The Islamicterminologyforlending is Qard (orQard Al-Hasan).The exegesisof the holyQ u r’ansu ggeststhatQard hasa charitablenature (chapter 2:28 0).A s su ch,the person makingaQard cannotexpectanybenefitorexcess from the receiverofthe Qard.M oreover,late repaymentpenalties cannotbe enforced .B ecause of itscharitablenature,Qard isexclud ed from the ruleof Riba of delay,althou ghitembed s ad eferred settlement.Qard withinterestloses its charitablenatureand hence isconsidered Haram bythe Sunni d octrine of Riba of delay.Itisalso prohibited accordingtothe Shia schoolofthou ghtonthe basisofthe charitablenatureof Qard.

11 The majorityof Islamicjuristsbelieve thatinterestincommerciallendingorself-interest loans isalso forbidd en.A nu mberof juristsclassify thisinterestasa“su btle”Riba (Al-Kasani,

1997 ;A l-Shirbini,1994),whereasotherssu chasA l-Zu hayliand A bu Zahra(Al-Zu hayli,2003;

A bu Zahra,197 0)treatitasan“obviou s”Riba.B othof these juristsargue thatallowinginterest inlendingwou ldchange money intoanobjectof commerce;whereasitismerelyaninstrument for measu ring the value of commodities (Abu Zahra,197 0;A l-Zu hayli,2003).A l-Sanhuri

(1953)and A l-Zu hayli(2003)condemn commerciallendingbecause they believe thatitisu nfair and propose aprofit-loss sharingmod e offinance.

There are afew jurists,however,whoexemptthistype of lendingfrom the d octrine of

Riba.RashidRida(197 0)claims thatonly pre-Islamic Riba isprohibited foritsown sake bythe holyQ u r’an13.H e argues thatintereston lending isaninstance of Riba of excess,which is prohibited asapreventatived evice,even thou ghthe excess willbe paid atthe end of lending period.A mongShia jurists,B ojnordi(2010)and Saanei(2004)claimthatcommerciallendingis notsu bjecttothe banimposed by Sharia.They believe thatthe prohibition of Riba in lending is merelyattribu ted to Qard tothe poorand the need y.

4. Mainstream Islamic Scholars’Perception

Interest-bearinglendingisprohibited by the d octrine of Riba;however,cred itsales are allowed by majorIslamicschools14 (Saleh,198 6;A l-Zu hayli,2003;B ojnordi,2010).O ne can sellaprodu cton cred itatahigherprice by incorporatingthe time value of money (interest).A s su ch,toavoid Riba and fu lfilthe requ irementsof Sharia,Islamicscholarsinitiatethe so-called

13 A l-Sanhuri(1953)shares the same view asof Rashid Ridathatpre-Islamic Riba isthe onlyform of “obviou s” Riba. 14 The majorityof Shia juristshave even authorized d iscou nting d eferred paymentbillsifthey are based on a commercialtransaction(Bojnordi,2010). 12 “Islamicfinance”on the basisof the Islamicrules on transactions,Figh al-Muamalat,wherein

Islamicfinanciersplaythe roleof atraderoraninvestorinlieu of alend er15.Forinstance,a

Murabaha contract isd esigned based on cred ittrade,and u sed by Islamic financiers for provisionof Sharia-compliantfinancialservices,bypurchasingthe goods tobe financed onsight basisand then resellingthem oncred itatahigherprice totheirclients.

Since d efaultpenalties are forbidd en by majorjurists,Islamicfinanciersu se rebates to encou rage theirclientsfortimelypayment(Khanand A hmed ,2001).They embed anexcess to the cred itsaleprice whichwillbe paidbacktoclientsiftheyfu lfiltheirpaymentcommitmenton time.Insome cou ntries su ch asP akistan,the d efaultpenaltyisallowed ,onlyifitisspenton charity(Baeleetal.,2014).InIran,inordertocollectd efaultpenalties,acovenantisadd ed to

Islamicfinance contractsthatcommitsclients(borrowers)toremu nerate financiersforapre- specified d amage/loss tobe incu rred by financiers d u e toclients’non-fu lfilmentof payment commitmentond u e d ates (Bojnordi,2003).

5. Criticisms of Mainstream Islamic Finance

Severalscholarsbelieve thatfu nctionallythere islittled ifference between Islamicand conventionalfinancialprodu cts;Islamic are merely mimicking conventionalbanks

(Ku ran,1993,2004;El-Gamal,2006;H amou d i,2007 ;Khan,2010).Ku ran(1993)associates the similarityof the two systems tothe factthatbothare practised inanasymmetricinformation environment.A s su ch,Islamicbanks have no choice bu ttofollow the same techniqu es and principles thatareadopted byconventionalbanks.

15 P lease refertoEl-Gamal(2006)forstructureand mechanism ofIslamicfinance prod u cts. 13 El-Gamal(2006)argues thatIslamicfinance su ffersfrom economicinefficiency because of itshighertransaction costs16 and provides littleeconomicvalue.H e attribu tes thisproblem to juristicinferences of majorSunni scholarswhichisbased on reasoningby analogy17 .H e points ou tthatwe shou ldfocu s more on the su bstance and spiritof Islamiclawwhichinhisopinion is avoidingexcessiveindebted ness and risktaking.H e fu rtherclaims thatwe shou ldsticktoforms, thou ghthey are inefficient,toensu re adherence toreligion,and atthe same time and more importantly,follow the economicsu bstance of Islamiclaw.H owever,H amou d i(2007 )argues thataformalistapproach,which isapplicableinparticu larreligiou s rituals,cannotbe u sed in finance,because finance has a fu nctionalnature and financialinstitutions have emerged for fu nctionalreasons,and approachingthem inahighlyformalistmannerseems meaningless.H e putsforththe case of and pointsou tthatitcanbe easilymanipulated tofu nction exactlythe same asinterest-based loans18 .

Khan (2010) argues thatafter three d ecades from itsinception,Islamic banking and finance isfu nctionallyverysimilartoconventionalbankingd espiteitsadvocates claimingthat

Islamic finance willd istinguish itselfby stronger promotion of justice and wealthequ ality

(Chapra,198 5;Usmani,1998 ).Overall,manyscholars(Vogeland H ayes,1998 ;Fadel,2008 )d o notfind the theories putforward toexplainthe orthodoxyof Riba convincing.

Thereisageneralconsensu s amongIslamicjuriststhatdefaultpenalties arean“obviou s”

Riba;however,the wayitistreated u nderIslamicfinance and bankingshows how formalistic the existingapproachis.The otherexampleisthe relationshipbetween Islamicbanksand their

16 A nu mber of stud ies claim thatSharia-compliantfinancialprod u ctsand services are more expensive than conventionalones (e.g.B aeleetal,2014). 17 H e believes thatalthou ghShia schoolallows itsjuriststou se d ifferentmeans of jud icialinference su chasreason (Aql),the principleof caution (Ihtiat)hastempted the accorded freed om.M oreover,Shia-dominated cou ntries has extrapolated Islamicfinance from Sunnis. 18 Recentlysu ch manipulation ispracticed by some practitioners u nder the name of Tawarruq or Reverse Murabaha;accordingtoEl-Gamal(2006)onlysome juristsfrom Hanbali Schoolhave validated itslegitimacy. 14 d epositors.Financialsecu rities are d efined by the rightsthatthey createfortheirowners:shares entitletheirownerstovoteforthe firm’smanagement,whereasd ebtsecu rities give the rightto seize and liqu idatecollateralincase ofthe firm’sfailuretomake fixed promised payments(Hart,

1995;LaP ort,etal,1998 ).

Islamicbankingtheoryclaims thatrealized profitorloss mu stbe shared between Islamic banks and d epositors,which su ggestsanequ itynature;however,contrarytoequ itysecu rities, d epositorsof Islamicbanksare notgiven the voice toexertcorporatecontrol;rather,similarto d epositorsof conventionalbanks,they canonlyvotewiththeirfeet.Inpractice,Islamicbanks payamarketrateofreturntotheird epositorsirrespectiveofthe actualou tcome toavoidruns on the (Obaidu llah,2005).C hongand L iu (2009)show thatinM alaysiathe rateof returns to

Islamicbanks’d epositorsare pegged toconventionalbanks’d epositrates.H ence,d epositsin

Islamicbankingserve the same fu nction asd epositsof conventionalbanks,bu twithad ifferent form.

Islamicbanks finance theirclientsu sing trade transactions.Forinstance,in Murabah,

Islamicbankspurchase the u nderlyinggoods onthe spotand then resellthem atahigherprice to theirclients.Forthe purchase ofthe goods,they normallygiveagency totheirclientsinorderto avoid a realtrade.Since ownershipcarries itsspecific risks,clientsare requ ired toforesee necessaryarrangementstoavoidanyloss toIslamicbanks.Thisframeworkfollows the objective of asimpleloancontractinconventionalfinance,bu tthrou ghamore complicated proced u re.Is complexitythe majorobjectiveofthe d octrine of Riba?

6. Fallacies of Ribain Commercial Lending

The majorityofjuristsbelieve thatrestrictionof Riba inlendingalso includ es lendingfor bu siness and investmentpurposes.Inthissectionwe examine the rationalesetforthbythem: 15 6.1.RIBA IN L EN D ING ISINJUSTIC E

A nu mber of Islamic jurists(Al-Sanhuri,1953 and A l-Zu hayli,2003 among others) believe thattakingRiba inlendinginanyformisinjustice and oppression ofborrowers,because they have torepayd ebtirrespectiveof theirearnings.Forinstance,A bu Zahra(197 0)and A l-

Zu hayli(2003)cond emn interest-based lendingfornotsharingthe possibleincu rred loss with entrepreneu rsand su ggestequ ityand partnershipcontractsforfinancing.

Riba inlendingd u ringthe med ievaleracou ldbe oppressiveforborrowers,asatthattime lenderswere wealthyand had more bargainingpowercompared tothose borrowerswhowere poor and need y.C ontemporary financialsystems,however,have evolved tomobilize small savings tomeetthe financingneed s of entrepreneu rswho are generallywealthierthansavers, because modern theory of finance su ggests thatborrowers mu st have adequ ate wealthto convince lend ersthatthey have enou ghincentivetoexerteffortand properlyimplementthe u nderlying projects (Stiglitz and W eiss,198 1;Tirole,2006).M oreover,as of the 1920s borrowersare protected by limited liabilityand,inthe case of d efault,there are no (oratleast limited ) non-pecu niarypenalties su ch asphysicalpenalties orjaillike whatwaspractised in ancienthistory(Diamond ,1996).M oreover,inmany cou ntries,intereststopsaccruingfrom the time bankruptcyisfiled (forinstance C hapter11 U.S.C.§ 502(b)(2006)inthe U.S.).

Inaperfectmarketcond ition whichisd escribed by M odiglianiand M iller(1958 ),i.e.a world withou tasymmetricinformation problems,profitand loss sharingisthe bestchoice and serves the purpose of fairness.Inthe realworld,peoplemayu se equ itycontractsininformal marketsso longastheyknow eachotherverywell;however,inthe formalfinancialsystem there isthe possibilityof friction.A s su ch,when the revenu e of anu nderlying projectisnoteasily verifiable,debtisthe optimalcontract(Townsend ,197 9;Galeand H ellwig,198 5).B anks can 16 u se monitored d ebtcontractsinordertoavoidcostlyand inefficientliqu idation and examine the cash flow of the financed project inthe d ownside scenario(Diamond,198 4).From the borrower’spointof view,M yersand M ajlou f (198 4)show thatwiththe presence of information asymmetry,equ ityfinance isthe mostexpensiveand hence leastfavou rablesou rce offu nding.

Itisinterestingtonotethateven Islamicbanksu se mainlyd ebtand lease base contracts ratherthanprofitand loss sharing(Millsand P resley,1999;A ggarwaland Y ou sef,2000;D ar and P resley;2000;C hongand L iu;2009)19.Thisisinline withthe ideaof Ku ran(1993)that

Islamicbanksfollow the techniqu es adopted byconventionalbanks,because they also operatein anasymmetricinformationenvironment.InaHadith attribu ted toM u saal-Kadhim,the 7 th Imam of Twelver Shia,commerciallending isclassified as Riba (Al-Hu rrA l-Amili,1693).The prohibition isvalidinthaterabecause entrepreneu rswere notprotected by limited liability,and there were no su pportivelaws forbankruptfirms;moreover,individu alsmade theirinvestment d ecisionsinaninformalfinancialmarketwithenou ghinformationfrom theircou nterparts.

Itcan be seen thatthe context withinwhich the prohibition of Riba was initially introdu ced hasbeen thorou ghlychanged d u ringrecentcenturies.Now lend ingcaneven lead to the oppressionoflend ers;Jensen and M eckling(197 6)show thatdebtincapitalstructurecreates incentives formoralhazard problem,because managers-actingon behalfofequ ityholders-may follow riskyprojectsatthe costof d ebt-holders.Finally,withinIslamicmodes of finance,both d ebt-based and profitand loss sharingmodelsare valid,and no preference hasbeen reported by pre-modernIslamiclaw(Fadel,2007 ).

Itcanbe posited thatinterestincommerciallendingshou ldnotbe considered asillicit,so longasitdoes notbreachthe justice pillarof Islam.A s su ch,paydaylending,forinstance,treats

19 A bed ifaretal.(2013)elaboratehow Islamicbanksd eviatefrom the principleinpractice and mimicconventional banking. 17 the need y peopleinanopportunisticmannerand canbe considered asthe su bjectofthe d octrine of Riba,because borrowersare inneed of averysmallloanand payrelativelyahighinterest rate.InC olorado forinstance,the paydayloans originated between July2000 and D ecember

2008 on average are $300 invalue,bear$55charge atannu alinterestrateof 452% foraperiod of17 d aysand renewed severaltimes (DeY ou ngand P hillips,2009).

The otherargumentraised by afew juristsisthatinterest-based lendingputcapitalina betterposition thanlabou r.Forinstance,A bu Zahra(197 0)claims (asqu oted inFadel,2008 ):

“the spread of lending at interest is nothing other than the severe tyranny of capital over labour and all other means of production”.Thisargumentisnotvalid,because withinIslamicmodes of finance,Mudarabah is a form of contract u nder which a party provides capitalto the entrepreneu rand the returnwou ldbe shared between the two parties.Enteringintothiscontract inlieu ofd ebtdoes notguarantee afairtreatmentofcapitalversu s labou rbecause,forinstance in economies withu nder-developed financialsystems and scarcityof capital,aninvestorcanclaim ahigherproportion of profit,ord emand the fu llreturnof hercapitalbefore any payoff tothe entrepreneu r.

6.2.PRO H IB ITION O F RIBA IN TH E H O L Y Q UR’AN ISGEN ERIC

The holyQ u r’and oes notexplicitlymentionwhichtypeof Riba isforbidd en and whether commerciallendingisexclud ed from the prohibition.Nevertheless,we caninvestigatewhether the d octrine of Riba isapplicabletocommerciallendingby examiningthe contextwithinwhich the prohibition isimposed and the add ressees of the verses.Since Riba isputforward against

Infaq,Iargue thatthe mainideaisprotectingthe need yfrom expropriation.M oreover,du ringthe eraof the P rophet,contemporaryfinancialsystems had notemerged and borrowingwasmainly

18 forprocu rementofthe necessities oflife.Overall,itseems tood ifficu lttoclaimthatcommercial lendingissu bjecttothe d octrine of Riba.

6.3.RIBA IN C OM M ERC IAL LENDINGM USTB E FORB IDDEN A S A PROPHYLAC TIC RUL E

A notherargumentisthatbecause of itsresemblance to Qard (Qard A l-Hasan),Riba in commerciallendingisprohibited ,since the popularityof thistype of Riba d iscou rages M u slims from charityand grantingQard Al-Hasan.Forinstance,A bu Zahra(197 0)claims (asqu oted in

Fadel,2008 ):“the proliferation of lending at interest has encouraged many to become extravagant and neglect to save”.Thisargumentmaybe valid and true;however,the existing

Islamic finance cannotbe a solution as itsu ffers from the same criticism.P rohibition as a prophylacticruleisnotrelevantinthe contemporaryworld withd eveloped financialsystems, because therearesomanyalternatives forinvestment.

6.4.RIBA IN C OM M ERC IAL LENDINGISFORB IDDEN B EC A USE M ONEY DOES NOT H A VE A NY INTRINSIC VA LUE

Inresponse tocritics of mainstream Islamicfinance and itsresemblance infu nction to conventionalfinance,e.g.the case of Murabaha20,severalIslamicjurists(Abu Zahra,197 0;A l-

Zu hayli,2003 amongothers)argue thatRiba inlendingisessentiallyu nlawfu l,because money d oes nothave any intrinsicvalue and ismerelyaninstrumenttomeasu re value.Forinstance,

A bu Zahra(197 0)claims (asqu oted inFadel,2008 ):“Currencies are the means of valuation, so time by hypothesis does not affect them”.Thisargumentisnottrue,because money byd efinition

20 If Riba inlendingisinjustice,then cred itsaleof acommod ityatahigherprice (withmark-up)thatreflectsan excess similartointerestinlendingmu stbe alsoconsidered u nfair. 19 also serves asameans forstoringpurchasingpower;hence,one isready topaytoavailherself withpurchasingpower.

7. Implications of the Doctrine of Riba in the Contemporary World

I argue thatthe prohibition of Riba d oes notimplythe illegitimacy of conventional banking and finance.Thisraises animportantqu estion astowhether the d octrine of Riba is applicableinthe contemporaryworld,and ifso how itshou ldbe enforced .The d octrine of Riba attemptstopreventthe oppression of the poorand exploitation of the need y,and interest-based lending wasjustaninstance inthe med ievalera.M oreover,itcomplementsthe emphasison helpingthe poorprescribed bythe d octrine of Infaq.

Implication of the d octrines of Riba and Infaq need tobe revisited by payingsu fficient attention towards the features of the contemporaryworld.Forinstance,inthe U.S.,stillthe strongestcou ntryinthe world,arelativelylow tax (and amodestsocialsecu rity)system has been adopted .Nevertheless,loantakersbenefitfrom the tax shieldthankstothe d iscrimination imposed by the classicaltax system.M oreover,tomaximize exploitation of the tax shield, financialintermed iaries are su bjectmerelytoaverysmallcapitalrequ irementand atthe end they receivebailou tsatthe time of crisis(Ad mati,etal.,2013).The poorand the midd leclass hou seholds aresystematicallyoppressed u nderthissystem asitallows highnetworthindividu als toappropriateaconsiderableproportion of the publicfu nds and canbe regarded asone of the instances of the d octrine of Riba inthe contemporaryworld.Ipropose the followingagendato observethe scripturalind u ction:

The firststep isestablishing awell-fu nctioning and efficientsocialsecu ritysystem in order toprovide the poorand low income hou seholds withequ alopportunityfored u cation, healthand any otherbasicnecessities toflou rish.The existingpolicy of Scandinaviancou ntries 20 cou ld be agood instance tostartwith.H owever,thisrequ ires levyingrelativelyhightaxation, which leads tothe trade-off between socialwelfare and efficiency loss d u e toastate’swealth- red istribu tion-system.A s su ch,the pre-requ isiteforenforcingthe d octrines of Riba and Infaq is havingatransparent,efficientand accou ntablegovernment.

The classicaltax system d iscriminates between d ebtand equ ity;itrewards those who benefitfrom leverage withtax relief.Thissu bsidy canexacerbatefragilityof financialsystems, and u ltimatelycreatenegativeexternalities,by encou ragingexcessiveindebted ness.The second stepis,therefore,revisitingthe tax system withthe objectiveoffairtreatmentofd ebtand equ ity fu ndingassu ggested by B oadwayand B ruce (198 4)and D evereu x and Freeman(1991).Thisis particu larlyimportantforthose who maybelieve thatd ebtcontractsare u nfair.Fu rthermore,

P iketty(2014)pointsou tthatincreasingincome inequ alities canbe partlyexplained by the fact thatwealthcangrow atahigherratethanoverallou tputand wages foralongperiod oftime.A s su ch,he proposes aprogressivetax oncapital,und erclose internationalcooperationand regional integration,tocontaininequ alities ofwealth.

Inmany d evelopingcou ntries scarcityof cred itsplace the ownersof wealthinabetter positionfornegotiationwithentrepreneu rsand labou r.A n efficientfinancialsystem preventsthe tyranny of pecu niarywealthon ideas and labou r.The third step isthen promoting financial d evelopmentsu ch thatsavings are efficientlymobilized and allocated tothe mostpromising projects(asprescribed foreconomicd evelopmentby severaleconomistssu ch asSchumpeter,

1912 and H icks,1969)and also so thatfinancialexclusion reaches itsminimu m level.Financial d evelopment,however,requ ires revisitinglegalsystems withthe objective of havingclear,fair and su pportiverules and anefficientenforcementprocess (LaP ortaetal.2000).M oreover,we shou ldprud entlysu pervise and regulatefinancialdeepening,asitcanease expropriation of low ormidd leclass peopleeitherinthe form of squ anderingthe publicfu nds d u e toadoptingalax 21 lendingpolicy asoccu rred d u ringthe 2004-06 period preced ingthe cred itcrunch2007 -08 (The

FinancialC risis Inqu iry Report,2011) or oppressing consu mers throu gh making them excessivelyindebted withthe objective of stimu lating the d emand side withou t increasing hou seholds income.B arba and P ivetti(2009) stud y the U.S.economy over the 198 0-2005 period,the time span witha su bstantialincrease inincome inequ ality,and conclud e that hou sehold d ebtisprincipallyu sed asasu bstituteforincrease inwages and publicexpenditure.

H yman(2011)argues thatinthe post-Bretton W oods era,du e toabu ndantliqu idityand asset- price appreciation,increase inwage isreplaced by expansion of consu mercred itsresu ltingina significantrise inhou sehold’sindebted ness.H ence consu mer loans isno longer a personal choice,bu tasystematicnecessity.Su chaneconomicpolicy ispossiblyanotherinstance of Riba inthe modernW orld.

Ed u cation isthe fou rthstep.P overty can show u p because of mismanagement or insu fficientfinancialknowled ge.Inthe case of paydayloans,borrowersinthe U.S.are eligible toreceive su chloans ifthey have asteady income and abankaccou nt(DeY ou ngand P hillips,

2009);however,they often havesmallloans thatare refinanced atexcessivecost.There are also many examples of individu alslosing theirfortune because of investing ina single stock21.

H ence,principles offinance canbe taughtatthe schoolleveltohelphou seholds intheirfinancial d ecision and wealthmanagement.Finally,policy makersand activistsshou ld inspire financial and nonfinancialinstitutions withcorporate socialresponsibility22.Thiscan be helpfu l to encou rage fair-minded ness inou rsociety.

21 B ased on personalexperience as a broker inTehranStock Exchange d u ring 1997 -98 ,I observed thatsome investorslostmostof theirfortune because they invested heavilyinasinglestock thatexperienced sharpfallsin price. 22 Thankstoemergence ofresponsibleand ethicalfinance,now manyIslamicfinancialinstitutionsattempttofollow ethicalfinance asanotheraspectofIslamicfinance. 22 8. Concluding Remarks

The belief generallyaccepted amongIslamicjuristsand scholarsisthatthe holyQ u r’an prohibits Riba,bu titd oes notprovide the exactd efinition.Itmerelycontrasts Riba vis-à-vis

Infaq.A s su ch,religiou s scholarsseektofind the d efinitioninpropheticnarration(Farooq,2007 ,

2009;Thomas,2006;H amou d i,2007 ).H owever,the majorityof Islamicjuristsbelieve thatthe prohibition of Riba intrade wasenacted by the P rophetM u hammad asaprophylacticrule.In response toreligiou s ind u ction on the one hand and necessityof finance on the other hand,

Islamic jurists initiated the so-called “Islamic finance”on the basis of Islamic rules on transactions,Figh al-Muamalat,whichhasreceived criticism from manyscholars.

Ishare the ideawiththose whobelieve thatIslamicjuristsadoptaformalisticapproach and Islamicfinance serves no su bstantialend bu ttofollow whatitsproponentsbelieve tobe the willof God.Iargue thatmanyjuristsoverlookthe emphasisof God on forgoingthe specu lative view onthe need ofthe poor,and inadd itionhelpingthem asd emanded bythe d octrine of Infaq.

They highlighttrade againstlending vis-à-vis Riba against Infaq and thereby they indeed u nintentionallyeffectuatethe claims of u su rersthat“trading is only like usury” (chapter2:27 5), because theyreshufflethe process oftakingRiba and institutionalize itintrade inlieu oflending.

Inotherwords,theyembed Riba intrade inanattemptforthe omissionof Riba inlending.

A partfrom the literalapproachwhichiswelladd ressed byseveralscholars,Ibelieve that the problem arises from the factthatIslamicjuristsmainlyconsiderthe holyQ u r’anasalaw textbook;they attempttomake itpossible for M u slims tocarry ou ttheiractivities withou t violatingreligiou s ordersand,where necessary,u se the loopholes and benefitfrom regulatory arbitrage.El-Gamal(2006)coins the term “Sharia arbitrage”tod escribe Islamicfinance and u rges payingsu fficientattention tothe spiritof Islamiclaw;nevertheless,inhisbook(page 50), he mentions thatthe d octrine of Riba cannotaimatpreventingexploitation of the poor,because 23 “a usurer can equally easily exploit a needy debtor by selling him a property of market value

$100, say, for a deferred price of $1,000, without violating the rules of riba as envisioned by jurists.”Su ch anapproach towards religiou s textsresu ltsinthe establishmentof the so-called

“Islamicfinance”inspired bythe P ropheticindu ctionnotwithstandingitspreventativenature.

The holyQ u r’anisabookforguidance towards humanbliss,and itssocialindu ctions specificallymu stbe considered and inferred withthe view ofthe correspond ingenvironment.A s su ch,we shou ld revisitimplications of the scripturalindu ction based on the need s of the contemporaryworld,otherwise itislikelytobe eithersetaside orbypassed .Ifu rtherargue that we shou ldinviteeconomiststoassistind esigninganeconomicsystem u nd erwhichthe poorand the need y are treated on the basisof justice.W e shou ld have a d ifferentapproach for non- worshippingwillsof God -Riba inou rcase-ascompared tod evotionalritualssu ch asprayer, fasting orpilgrimage;forthe latter,we refer tod efinitions and d etailsprovided inP rophetic traditions and adhere tothe forms;however,forthe former,d efinition and solutions mu stbe reached withthe helpofexperts,e.g.economistsinthe case of Riba.W e cannotestablishspecial forms for finance and bu siness to show ou r fidelity to ou r religion.Thiswou ld merely complicatemechanisms and impose ad ead-weightloss toou rsociety.

Interest-bearingloans,weremerelyaninstance ofexploitingthe need yinmed ievaltimes.

The d octrine of Riba isbroaderthanlendinginthe contemporaryworld.Itattribu tes togeneral economic policy and can be considered alongside the d octrine of Infaq.I also su ggest a frameworktoregulatorsand policy makersforfu lfillingthe d octrines of Riba and Infaq.Even thou ghitcanbe argued thatthere isageneralconsensu s on the proposed agendaand many of proponentsof Islamicfinance maybelieve inthem,religionis,nevertheless,su pposed togivean extraincentive for following policies thatare condu ctive tomore justice and kindness as prescribed bythe holyQ u r’an(chapter16:90). 24 References

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26 H olyQ u r’an,chapter 2:3,43,8 3,110,17 7 ,215,219,245,261-28 0;chapter 3:92,130-134; chapter 4:77 ,162;chapter5:12,55;chapter8 :3;chapter9:5,11,18 ,54,60,7 1,103; chapter13:22;chapter14:31;chapter16:90;chapter19:31,55;chapter21:73;chapter 22:35,41,7 8 ;chapter24:37 ,56;chapter30:39;chapter35:29;chapter 42:38 ;chapter 47 :38 ;chapter57 :7;chapter63:10;chapter64:15-17 ;chapter7 0:15-25;chapter7 3:20. H yman,L .(2011)Debtor nation: The history of American in red ink.P rinceton,NJ:P rinceton UniversityP ress. Ibn Q ayyimA l-Jawziyya,M .(197 3)I‘lam Al-Muwaqqi‘in ‘an Rabb il-‘Alamin.B eirut:DarA l- Ku tub A l-‘Ilmiyyah. IbnRu shd,M .(1997 )Bidayat Al-Mujtahid wa Nihayat Al-Muqtasid.B eirut:DarA l-Ma‘rifah. IslamicFinancialServices B oard (2015)IslamicFinance forA sia:D evelopment,P rospectand InclusiveGrowth,M ay.IslamicFinance Service B oard Jensen,M .and M eckling,W .H.(197 6)Theoryof the firm:M anagerialbehavior,agency costs and ownershipstructure,Journal of Financial Economics 3,305-360. Johnson,P.(2009)History of the .New Y ork:H arperC ollins Khan, F.(2010) H ow ‘Islamic’ is Islamic banking? Journal of Economic Behavior & Organization 76,805-820. Khan,T.and A hmed ,H .(2001)Risk management:A n analysisof issu es inIslamicfinancial indu stry,Occasional Paper No. 5,IRTI,IslamicD evelopmentB ank,Jed d ah. Ku ran,T.(1993)The economicimpactof Islamicfu ndamentalism.In:M arty,M .E.,A ppleby, R.S. (Ed s.), Fundamentalisms and the State: Remaking Polities, Economies, and Militance.C hicago:UniversityofC hicagoP ress,pp.302–341. Ku ran,T.(2004) Islam & Mammon: The Economic Predicaments of .P rinceton: P rincetonUniversityP ress. L aP orta,R.,L opez-de-Silanes,F.,Shleifer,A .and V ishney,R.W .(1998 ) L aw and Finance, Journal of Political Economy 106,1113-1155. L aP orta,R.,L opez-de-Silanes,F.,Shleifer,A .and V ishney,R.W .(2000)Investorprotection and corporategovernance,Journal of Financial Economics 58 ,3-27 . L evillain,P.(2002)The Papacy: An Encyclopedia, volume 2.New Y ork,London:Rou tled ge.

M ills,P.S.and P resley,J.R.(1999)Islamicfinance:Theoryand practice,Macmillan,London. M odigliani,F.and M iller,M .H.(1958 )The costofcapital,corporationfinance and the theoryof investment,American Economic Review 48 ,261-97 . M yers,S.C.and M ajlou f,N.S.(198 4)C orporatefinancingand investmentd ecisions when firms have information thatinvestorsd o nothave,Journal of Financial Economics 13,18 7 - 221. O baidu llah,M . (1999) Financial Option in Islamic Contracts: Potential Tools for Risk Management,JKA U:IslamicEconomics 11,3-26.

27 O baidu llah,M .(2005) Islamic financial services, Research C enter, King A bdu lazizUniversity,Jed d ah,Saud iA rabia. P iketty,T.(2014)Capital in the twenty-first century,translated by A .Goldhammer.C ambridge, M A :The B elknapPress ofH arvard UniversityP ress. Rida,R.(197 0)Fatawa Al-Imam (Al-Mu najjid,S.and Khuri,Y.ed s.) B eirut:Daral-Kitabal-Jadid. Saanei,Y.(2004)Productive Usury.Qom:Fighal-ThaqalaynP ress. Saleh,N .A.(198 6) Unlawful Gain and Legitimate Profit in Islamic Law: Riba, and Islamic Banking.C ambridge:C ambridge Stud ies inIslamic C ivilization,C ambridge UniversityP ress. Schumpeter,J.A.(1912) Theorie der Wirtschaftlichen Entwicklung [The theory of economic development].L eipzig:D u nker & H u mblot;translated by Red vers O pie.C ambridge, M A :H arvard UniversityP ress,1934. ShahidThani,Z.(1558 )Al-drayya fi Elm Mustalah al-Hadith.Qom:Firooz A badiP ress. SirH arryP age ‘InRestraintofUsu ry:The L endingof M oney atInterest’C hartered Institutefor P u blicFinances and A ccou nts(CIPFA ),London,198 5. Stiglitz,J.and W eiss,A .(198 1)C red itrationing inmarketswithimperfectinformation,The American Economic Review 71,393-410. Tabatabai,M .H.(197 9) Shi’ite Islam;ed ited and translated by S.H.N asr.N ew Y ork:SUN Y P ress. The B anker(2013)Islamic finance in 2013: Beyond the growth,M arch. The FinancialC risisInqu iryReport(2011) Final report of the National Commission on the causes of the financial and economic crisis in the United States,Janu ary. Thomas,A .(2006)Interest in Islamic Economics.London:Rou tled ge. Tirole,J.(2006)The Theory of Corporate Finance,PrincetonUniversityP ress. Townsend, R.M. (197 9) O ptimalC ontracts and C ompetitive M arkets with C ostly State V erification,Journal of Economic Theory 21,265-93. Usmani,M .T.(1998 ) An Introduction to Islamic Finance.Karachi:IdaratulM a’arif,2nd ed ition. V ogel,F.and S.H ayes (1998 )Islamic Law and Finance: Religion, Risk and Return.The H ague: KluwerL awInternational.

28 APPENDIX 1. Infaq inthe H olyQ u r’an

Chapter 2, verse 110: “A nd keep u p prayer and pay the poor-rate and whatever good you send before for you rselves,you shallfind itwithA llah;su relyA llahsees whatyou d o.23”

Chapter 2, verse 177: “… bu trighteou sness isthisthatone shou ld believe inA llahand the lastd ayand the angelsand the B ookand the prophets,and giveawaywealthou tof love forH imtothe nearof kinand the orphans and the need y and the wayfarerand the beggarsand for(the emancipation of)the captives,and keepu pprayerand paythe poor-rate;and the performersof theirpromise when they make apromise,and the patientind istress and affliction and intime of conflicts-- these aretheywhoaretrue (tothemselves)and these aretheywhoguard (againstevil).”

Chapter 2, verse 215: “They askyou astowhatthey shou ld spend.Say:W hateverwealthyou spend,itisfor the parentsand the nearof kinand the orphans and the need y and the wayfarer,and whatever good you d o,A llahsu relyknows it.”

Chapter 2, verse 219: “… A nd they askyou astowhatthey shou ldspend .Say:W hatyou canspare.Thus d oes A llahmake cleartoyou the commu nications,thatyou maypond er,”

Chapter 2, verse 245: “W hoisitthatwillofferof A llahagoodlygift,so H e willmu ltiplyittohimmanifold, and A llahstraitensand amplifies,and you shallbe returned toH im.”

Chapter 2, verses 261-274: “The parableof those whospend theirpropertyinthe wayof A llahisasthe parableof a graingrowingseven ears(with)ahundred grains ineveryear;and A llahmu ltiplies forwhom H e pleases;and A llahisA mple-giving,Knowing(261)(As for)those whospend theirpropertyin the wayof A llah,then d o notfollow u pwhatthey have spentwithreproachorinjury,they shall have theirreward from theirL ord,and they shallhave no fearnorshallthey grieve (262).Kind speech and forgiveness isbetterthancharityfollowed by injury;and A llahisSelf-su fficient, Forbearing (263).O you who believe! d o notmake you r charityworthless by reproach and injury,like himwhospends hispropertytobe seen ofmen and d oes notbelieve inA llahand the lastd ay;so hisparableisasthe parableof asmoothrockwithearthu pon it,then aheavy rain fallsu ponit,soitleaves itbare;theyshallnotbe abletogainanythingofwhattheyhave earned ; and A llahd oes notguide the u nbelievingpeople(264).A nd the parableofthose whospend their propertytoseekthe pleasu re of A llahand forthe certainty'of theirsou lsisasthe parableof a garden on anelevated grou nd,upon whichheavy rainfallsso itbringsforthitsfruittwofoldbu t ifheavy raind oes notfallu pon it,then lightrain(issu fficient);and A llahsees whatyou d o

23 Iu se exclusivelythe Englishtranslationofthe Q u r’anbyM r.Shakir(18 66-1939). 29 (265).Does one of you like thathe shou ld have a garden of palms and vines withstreams flowingbeneathit;he hasinitallkinds offruits;and oldage hasovertaken himand he hasweak offspring,when,(lo! ) a whirlwind withfire initsmites itso itbecomes blasted ;thus A llah makes the commu nications cleartoyou ,thatyou mayreflect(266).O you whobelieve! spend (benevolently)ofthe good thingsthatyou earnand orwhatW e havebrou ghtforthforyou ou tof the earth,and d o notaimatwhatisbad thatyou mayspend (inalms)of it,whileyou wou ldnot take ityou rselves u nless you have itsprice lowered ,and know thatA llahisSelf-su fficient, P raiseworthy (267 ).Shaitanthreatens you withpovertyand enjoins you tobe niggardly,and A llahpromises you forgiveness from H imselfand abu ndance;and A llahisA mple-giving, Knowing (268 ).H e grantswisd om towhom H e pleases,and whoever isgranted wisd om,he indeed isgiven agreatgood and none bu tmen of u nderstandingmind (269).A nd whateveralms you giveor(whatever)vow you vow,su relyA llahknows it;and the u njustshallhavenohelpers (27 0).Ifyou givealms openly,itiswell,and ifyou hide itand giveittothe poor,itisbetterfor you ;and thiswilld o awaywithsome of you revild eed s;and A llahisaware of whatyou d o (27 1).To make them walkinthe rightwayisnotincu mbenton you ,bu tA llahguides aright whom H e pleases;and whatevergood thingyou spend,itistoyou rown good;and you d o not spend bu ttoseekA llah'spleasu re;and whatevergood thingsyou spend shallbe paidbacktoyou infu ll,and you shallnotbe wronged (27 2).(Alms are)forthe poorwhoare confined inthe way of A llah--they cannotgoabou tinthe land;the ignorantmanthinksthem tobe richon accou nt of(their)abstaining(from begging);you canrecognize them bytheirmark;theyd o notbegfrom men importunately;and whatevergood thingyou spend,su relyA llahknows it(27 3).(As for) those whospend theirpropertyby nightand by d ay,secretlyand openly,they shallhave their reward from theirL ord and theyshallhavenofear,norshalltheygrieve (27 4).”

Chapter 3, verse 92: “B y no means shallyou attaintorighteou sness u ntilyou spend (benevolently)ou tof whatyou love;and whateverthingyou spend,A llahsu relyknows it.”

Chapter 9, verse 60: “A lms are onlyforthe poorand the need y,and the officials(appointed )overthem,and those whose heartsare made toincline (totruth)and the (ransomingof)captives and those in d ebtsand inthe wayof A llahand the wayfarer;anordinance from A llah;and A llahisknowing, W ise.”

Chapter 9, verse 103: “Take alms ou tof theirproperty,you wou ld cleanse them and purify them thereby,and prayforthem;su relyyou rprayerisarelief tothem;and A llahisH earing,Knowing.”

Chapter 14, verse 31: “SaytoM y servantswhobelieve thatthey shou ldkeepu pprayerand spend ou tof what W e havegiven them secretlyand openlybeforethe comingofthe d ayinwhichthereshallbe no barteringnormu tualbefriending.”

30 Chapter 35, verse 29: “Su relythey whorecitethe B ookofA llahand keepu pprayerand spend ou tofwhatW e havegiven them secretlyand openly,hopeforagainwhichwillnotperish.”

Chapter 47, verse 38: “B ehold! you are those whoare called u pon tospend inA llah'sway,bu tamongyou are those whoare niggardly,and whoeverisniggardlyisniggardlyagainsthisown sou l;and A llah isSelf-su fficientand you have need (of H im),and ifyou turnbackH e willbringinyou rplace anotherpeople,then theywillnotbe like you .”

Chapter 57, verse 7: “B elieve inA llahand H isA postle,and spend ou tof whatH e has made you tobe su ccessorsof;forthose ofyou whobelieve and spend shallhaveagreatreward.”

Chapter 63, verse 10: “A nd spend ou tofwhatW e havegiven you before d eathcomes toone of you ,so thathe shou ldsay:M y L ord! whyd idstThou notrespiteme toanearterm,so thatIshou ldhave given alms and been ofthe d oersofgood d eed s?”

Chapter 64, verses 15-17: Y ou rpossessions and you rchildren are onlyatrial,and A llahitiswithW hom isagreat reward (15)Therefore be carefu lof (you rd u tyto)A llahasmu chasyou can,and hearand obey and spend,itisbetterforyou rsou ls;and whoeverissaved from the greed iness ofhissou l,these itisthatarethe su ccessfu l(16).Ifyou setapartforA llahagoodlyportion,H e willdou bleitfor you and forgiveyou ;and A llahisthe M u ltiplier(ofrewards),Forbearing(17 ),

Chapter 70, verses 15-25: “B y no means! Su relyitisaflamingfire (15)D raggingby the head (16),Itshallclaim himwhoturned and fled (from truth)(17 ),A nd amasses (wealth)then shutsitu p(18 ).Su rely man iscreated of a hastytemperament(19)B eing greatlygrieved when evilafflicts him (20)A nd niggardlywhen good befallshim(21)Exceptthose who pray(22),Those who are constantattheirprayer(23)A nd those inwhose wealththere isafixed portion (24).Forhim whobegsand forhimwhoisd enied (good)(25).”

Chapter 73, verse 20: “… and keep u p prayer and pay the poor-rate and offer toA llaha goodlygift,and whateverof good you send on beforehand foryou rselves,you willfind itwithA llah;thatisbest and greatestinreward … ”

31 APPENDIX 2. Riba inthe H olyQ u r’an

Chapter 2, verses 275-280: “Those whoswallow d own u su rycannotarise exceptasone whom Shaitanhasprostrated by (his)tou ch d oes rise.Thatisbecause they say,trading isonlylike u su ry;and A llahhas allowed tradingand forbidd en u su ry.To whomsoeverthen the admonition hascome from his L ord,then he d esists,he shallhave whathasalready passed ,and hisaffairisinthe hands of A llah;and whoeverreturns (toit)--these arcthe inmates of the fire;they shallabide init(27 5). A llahd oes notbless u su ry,and H e causes charitabled eed s toprosper,and A llahd oes notlove anyu ngratefu lsinner(27 6).Su relythey whobelieve and d o good d eed s and keepu pprayerand paythe poor-ratethey shallhave theirreward from theirL ord,and they shallhave no fear,nor shallthey grieve (27 7 ).O you whobelieve! B e carefu lof (you rd u tyto)A llahand relinqu ish whatremains (du e)from u su ry,ifyou arebelievers(27 8 ).B u tifyou d o (it)not,then be apprised of warfrom A llahand H isM essenger;and ifyou repent,then you shallhave you r capital; neithershallyou make (the d ebtor)su fferloss,norshallyou be made tosu fferloss (27 9).A nd if (the d ebtor)isinstraightness,then letthere be postponementu ntil(he isin)ease;and thatyou remit(it)asalms isbetterforyou ,ifyou knew (28 0).”

Chapter 3, verses 130-134: “O you whobelieve! d o notdevou ru su ry,makingitdou bleand red ou ble,and be carefu l of (you rd u tyto)A llah,thatyou maybe su ccessfu l(130).A nd guard you rselves againstthe fire whichhasbeen prepared forthe u nbelievers(131).A nd obey A llahand the M essenger,thatyou maybe shown mercy (132).A nd hasten toforgiveness from you r L ord;and a Garden,the extensiveness of which is(as)the heavens and the earth,itisprepared forthose who guard (againstevil)(133).Those whospend (benevolently)inease aswellasinstraightness,and those whorestrain(their)angerand pardonmen;and A llahloves the d oersofgood (toothers)(134).”

Chapter 30, verse 39: “A nd whateveryou layou tasu su ry,so thatitmayincrease inthe propertyof men,it shallnotincrease withA llah;and whateveryou giveincharity,desiringA llah'spleasu re--itis these (persons)thatshallgetmanifold.”

32 The Centre for Responsible Banking and Finance CRBF Working Paper Series SchoolofM anagement,UniversityofStA ndrews The Gateway,NorthH augh, StA ndrews,Fife, KY 16 9RJ. Scotland,United Kingdom http://www.st-andrews.ac.uk/bu siness/rbf/

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