Islamic Banking is Ḥarām

By
Imran Ahsan Khan Nyazee
©2012 Imran Ahsan Khan Nyazee
Table of Contents
1. The Prohibition of Ribā . . . . . . . . . . . . . . . . . . . . 1
2. Murābaḥah in Islamic Banks . . . . . . . . . . . . . . . . . . 5
3. Leasing as a Credit-Sale . . . . . . . . . . . . . . . . . . . . 7
A young student of reasonable intelligence will be able to understand the rules de-
scribed here, which makes one wonder why the great muftīs of our times fail to do so.
We will describe the rules of ribā first, followed by murābaḥah and then a few words
about leasing.
1. The Prohibition of Ribā
The following rules are based on the famous tradition of ‘Ubādah ibn al-Ṣāmit (God
be pleased with him). We will reproduce the tradition here; it is the tradition about the
six commodities:
1
،
ِ
ة ّ ض
ِ
فلا
ِ
ب ُ ة ّ ض
ِ
فلا
َ
و ، ِ ب
َ
ه
ّ
ذلا
ِ
ب
ُ
ب
َ
ه
ّ
ذلا﴿
َ
م
ّ
ل
َ
س
َ
و
ِ
هيَ ل
َ
ع ُﷲ ى
ّ
ل
َ
ص ِﷲ ُ لو
ُ
س
َ
ر َ لاَ ق : َ لاَ ق
ِ
ت
ِ
ما
ّ
صلا ِ نب َ ة
َ
دا
َ
ب
ُ
ع ن
َ
ع
َ
و
َ
فَ ل
َ
تخا ا َ ذِٕ اَ ف ،
ٍ
د
َ
ي
ِ
ب ًاد
َ
ي ،ٍءا
َ
و
َ
س
ِ
ب ًاءا
َ
و
َ
س ، ٍ لث
ِ
م
ِ
ب ًالث
ِ
م ،
ِ
حل
ِ
ملا
ِ
ب
ُ
حل
ِ
ملا
َ
و ،ِ رم
ّ
تلا
ِ
ب
ُ
رم
ّ
تلا
َ
و ،ِ ري
ِ
ع ّ شلا
ِ
ب
ُ
ري
ِ
ع ّ شلا
َ
و ،
ّ
ر
ُ
بلا
ِ
ب
ّ
ر
ُ
بلا
َ
و
.
ٌ
م
ِ
لس
ُ
م
ُ
ها
َ
و
َ
ر ﴾
ٍ
د
َ
ي
ِ
ب ًاد
َ
ي َ ناَ ك ا َ ذِٕا م
ُ
تئ
ِ
ش
َ
فيَ ك او
ُ
عيِ بَ ف ُ فا
َ
نص
ٔ
الا
ِ
ه
ِ
ذ
ٰ
ه
This tradition contains three straightforward commands on the basis of which the
jurists designed the contract of ṣarf. This is the contract of the currency dealer or the
ṣarrāf. The commands have been highlighted in different colours in the tradition. We
will reproduce the commands of the tradition after each relevant figure.
The meaning of ribā: By way of explanation we may say that ribā is of two types:
• Ribā al-faḍl or excess in weight or cubic measure, which the reader may treat as
excess in count here. Thus, the extra 10 dinars that have to be paid as interest in
the first figure on the following page is ribā al-faḍl.
1. From ‘Ubādah ibn al-Ṣāmit, who said, “The Messenger of Allāh (God’s peace and blessings be
upon him) said, ‘Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates,
salt for salt, like for like, equal for equal (that is, in equal weight or measure), and from hand to
hand. If these species differ, then, sell as you like, as long as it is from hand to hand.’ ” It is
reported by Muslim. Al-Ṣan‘ānī, Subul al-Salām Sharḥ Bulūgh al-Marām, vol. 3, 72.
1
2 Islamic Banking is Ḥarām Rin¯
• Ribā al-nasī‘ah or excess of delay, which arises fromthe use of money over time.
It is also called the time-value of money. It is in reality this ribā for which ribā
al-faḍl or the first type is paid (rent on money).
The rule is: Bo+n +.rrs s+.+rr .novr .nr rnonini+rr, wnr+nrn +nr. rxis+ +o-
or+nrn ix oxr +n.xs.c+iox on r.cn ixrrrrxrrx+t. ix . srr.n.+r +n.xs-
.c+iox.
In the figure below we show a loan transaction in which A gives 100 gold dinars
to B, which B has to pay back after one year at 10 percent interest. In the language of
fiqh, we may say A sells 100 dinars to B for 110 dinars on credit. It is only a different
way of describing the loan transaction in the figure. That is all we need to know for
deciding what is ribā.
100 Dinars
(Gold)
100 + 10 Dinars
(Gold)
A
B
A pays 100 dinars to B
After one year
B pays 110 dinars to A
DELAY = ONE YEAR
When the two persons, A and B, are seen undertaking the above transaction, the
first command of the tradition is activated, that is, ٍءا
َ
و
َ
س
ِ
ب ًاءا
َ
و
َ
س ، ٍ لث
ِ
م
ِ
ب ًالث
ِ
م, or “make the
two sides equal in weight.” In other words, the extra ten dinars being paid by B is
not permitted. This extra ten is what is usually understood by the word “interest,”
and it is interest charged by the banks. Islamic banks agree that this type of interest
is prohibited, therefore, the legal validity of Islamic banking cannot be questioned on
this basis.
After the execution of the first command of the tradition, and the removal of the
interest of 10 dinars, the transaction that remains is shown in the following figure. A
is giving 100 gold dinars to B, which B will return after a period of delay that is one
year:
©2012 Imran Ahsan Khan Nyazee Advanced Legal Studies Institute
Rin¯ Islamic Banking is Ḥarām 3
100 Dinars
(Gold)
100 Dinars
(Gold)
A
B
A pays 100 dinars to B
After one year
B pays 100 dinars to A
DELAY = ONE YEAR
This transaction activates the next command:
ٍ
د
َ
ي
ِ
ب ًاد
َ
ي or exchange the two counter-
values at once, “from hand to hand.” It is this command that creates a problem for
Islamic banking. If we examine the transaction closely, we find that it is nothing more
than a transaction called “loan without interest.” The impact of the command is that
“no delay is allowed” and the parties must exchange their gold at once. Does this
command mean that a loan cannot be given, even if no interest is charged. The answer
is “Yes.” The command then spells the destruction of Islamic banking, or all banking
for that matter. If a loan cannot be given, because the tradition says it is unlawful,
then no banking can function. The reason is that any account that we open with a
bank—current account, savings account, fixed deposit and so on—is in reality a loan,
and according to this command no loan can be given. The Islamic banks are operating
in gross violation of this command of the noble tradition. We do not need detailed
arguments here as the matter is absolutely clear.
This command, however, creates another problem for some. If a loan is prohibited,
then what, they ask, is the interest free loan, also called qarḍ ḥasan. The answer is
that the above rule about the prohibition of a loan is imposed as an initial rule (called
‘zīmah), which is followed in all transactions. The only exception to the above general
rule is the interest free loan called ḥasan, which amounts to an exemption or rukhṣah to
the general initial rule. It has the same status as the lending of utensils or other things
that are returned, and is permitted with a number of conditions. The foremost among
these is that no period of repayment can be fixed—the lender can take it back the next
day or postpone it indefinitely. The qarḍ is the gifting of the “use of the loan amount”
for consideration other than business or personal gain on the part of the lender. The
borrower may use it for anything he likes, even for business. This form of loan is
treated as ṣadaqah by the sharī‘ah and is not examined through commercial rules.
Conclusion about the transaction called “loan with interest”: The above trans-
action considered in a combined form shows that in a regular bank loan with interest
both forms of ribā are found and both are prohibited. Ribā al-fadl represented by the
10 dinars is prohibited, while ribā al-nasī‘ah represented by “delay” is also prohibited.
Advanced Legal Studies Institute ©2012 Imran Ahsan Khan Nyazee
4 Islamic Banking is Ḥarām Rin¯
In the next figure the third command of the tradition is illustrated. Let us assume
that the exchange rate between gold dinars and silver dirhams is one is to ten (1:10).
2
Thus, if Agives 100 dinars to Bhe should be entitled to 1000 dirhams. Let us, however,
assume that the parties agree to an exchange rate of 1:14. The transaction will be as
follows:
100 Dinars
(Gold)
1400 Dirhams
(Silver)
A
B
A pays 100 dinars to B
After one year
B pays 1400 dirhams to A
DELAY = ONE YEAR
As delay is introduced into the transaction, a little refelection will show that this is
an attempt to create a loan transaction with or without interest. The tradition does not
bother about ribā al-faḍl in this case and says: ا َ ذِٕا م
ُ
تئ
ِ
ش
َ
فيَ ك او
ُ
عيِ بَ ف ُ فا
َ
نص
ٔ
الا
ِ
ه
ِ
ذ
ٰ
ه
َ
فَ ل
َ
تخا ا َ ذِٕ اَ ف
ٍ
د
َ
ي
ِ
ب ًاد
َ
ي َ ناَ ك or “When the species differ, sell as you like, as long as it is from hand to
hand.” In other words, no delay is allowed.
In this case, ribā al-nasī’ah or ribā arising from delay alone is prohibited.
100 Dinars
(Gold)
100 + 10 Dinars
(Gold)
A
B
A pays 100 dinars to B
B pays 110 dinars to A
SPOT = NO DELAY
In the above transaction there is no delay, but B is giving an extra 10 dinars to A.
Why? Perhaps, B is trying to bribe or has some other motive. The sharī‘ah is not
concerned with such motives here, and all that the tradition says: ٍءا
َ
و
َ
س
ِ
ب ًاءا
َ
و
َ
س ، ٍ لث
ِ
م
ِ
ب ًالث
ِ
م,
or “make the two sides equal in weight.”
2. The exchange rate today is completely different.
©2012 Imran Ahsan Khan Nyazee Advanced Legal Studies Institute
Min¯n.n.n Is Islamic Banking Haram? 5
MAIN CONCLUSION: The conclusion to be drawn from all the above is that not
only Islamic banking is prohibited, but all forms of banking based on the giving of
loans, and .novr .tt the artificial creation of money through central banks, Federal
Reserve or other, is prohibited. The credit system of capitalism is rejected and this
shows the real difference between Islam and capitalism.
2. Murābaḥah in Islamic Banks
We now turn to those devious or dubious methods that may be used to circumvent
the prohibitions explained in the above section. One such method is the murābahah
contract. In this contract, Aasks B(a trader) to buy something for himfromthe market
and instead of charging a fee he may charge a clearly stated profit. The original contract
was one of trust and cooperation. A person trusts another’s judgement and due to his
relations with himbelieves that he will deal honestly with himcharging himthe correct
original price and a reasonable profit. It is also for this reason of mutual trust that no
alteration in the original price is allowed.
90 Dinars
(Gold)
Wheat worth
90 Dinars
A
B
B buys wheat for A worth
90 dinars from C and gives
him 90 dinars
C delivers the commodity to
B and receives 90 dinars
SPOT = NO DELAY
100 Dinars
(Gold)
Wheat worth
90 Dinars
+
10 Dinars as
stated profit
C
B
A pays 100 Dinars for the
wheat and the stated profit
of 10 Dinars
B delivers the commodity to
A and receives 100 dinars
NORMAL MURABAHAH TRANSACTION
(A orders wheat from B on the basis of murabahah)
SPOT = NO DELAY
The first and most important rule for this transaction is: Tnr onioix.t rincn.sr
rnicr xis+ nr x.ix+.ixrr, .xr i+ c.xxo+ nr .t+rnrr, cn.xorr, nrricrr on ix-
cnr.srr ix .x. w...
Advanced Legal Studies Institute ©2012 Imran Ahsan Khan Nyazee
6 Is Islamic Banking Haram? Min¯n.n.n
The second important rule implied by the texts of the jurists is: Tnrnr c.x nr xo
rrt.. ix +nr +n.xs.c+iox .s +n.+ witt n.isr +nr rossiniti+. or cn.noixo nin¯.
3
The transaction above is self-explanatory. A buys wheat from B worth for 100
dinars. The original cost, which cannot be altered was 90 dinars, while the profit stated
and added is 10 dinars. It is obvious that transportation and other costs can be added to
the original cost, but these have been ignored for the present purposes. The important
thing to note is that there is no delay in the transaction and it is a spot transaction.
90 Dinars
(Gold)
Wheat worth
90 Dinars
A
B
B buys wheat for A worth
90 dinars from C and gives
him 90 dinars
C delivers the commodity to
B and receives 90 dinars
SPOT = NO DELAY
100 Dinars
(Gold)
Wheat worth
90 Dinars
+
10 Dinars as
stated profit
C
B
A pays 100 Dinars for the
wheat and the stated profit
of 10 Dinars
B delivers the commodity to
A and receives 100 dinars
MURABAHAH TRANSACTION AT ISLAMIC BANK
(A orders wheat from B, the Islamic bank, on the basis of murabahah)
DELAY = ONE YEAR
FIRST POSSIBILE TRANSACTION WITH BANK
SECOND POSSIBILE TRANSACTION WITH BANK
A
110 Dinars
(Gold)
B
Wheat worth
90 Dinars
B delivers the commodity to
A and receives 110 dinars
DELAY = ONE YEAR
A pays 110 Dinars for the
wheat. for the delay, and
for the stated profit
+
10 Dinars for
the delay of
one year
+
10 Dinars as
stated profit
Islamic banks have inserted the element of “delay” in the origninal transaction.
This makes the transaction unlawful. Two possibilities have been shown. In the first
3. There are other rules and conditions which have been discussed from the perspective of Islamic
banking in our book Murābaḥah and the Credit Sale.
©2012 Imran Ahsan Khan Nyazee Advanced Legal Studies Institute
Min¯n.n.n Is Islamic Banking Haram? 7
possibility, the transaction is more or less like the normal murābaḥah, except that a
delay of one year is introduced.
It is well known that a person who sells on credit usually charges more tha he would
in a sale on cash basis. The reason is that if he sells at the same price he will not receive
the same amount that he does when he sells for cash. The delay (and inflation) eats
into this price and reduces its value. In this situation if the bank sells at the cost price
plus a stated profit, it is actually not getting the price it paid for the commodity, but a
price decreased due to delay. The benefit here is going to the client. The transactions
is, therfore, lawful.
In actual practice the bank will never agree to this transaction as it produces a loss
for the bank. We may, therefore, turn to the second possibility.
In the second possibility, the bank, in order to make a profit, doubles the stated
profit; let us say 10 for the delay and 10 being a reasonable stated profit. This is no
longer murābaḥah as it involves two profits. Even if it is assumed that the entire 20
dinars may be treated as a stated profit, the contract is still unlawful as the original
cost price stands reduced due to delay (which the bank is trying to make up through an
enhanced stated profit). In short, the introduction of delay into the murābaḥah contract
makes it unlawful. Without this delay, the transaction becomes useless for the bank.
It may be asked, why does the bank wish to call it murābaḥah when the same thing
can be achieved with the regular credit sale in which the bank can charge more than
the normal profit. The reason is obvious, and for that we turn to the leasing contract.
3. Leasing as a Credit-Sale
Most leasing contracts must be based on the credit sale or some of credit. For
example, the bank buys a car for $10,000, and sells it to the client for $13,000 to be
paid over a period of three years. The additional $3000 is for the delayed period of 3
years. This is lawful according to Islamic law.
What is not lawful according to Islamic law is that the banks never transfer the
title to the client at the time of the lease contract. Under Islamic law, the title passes
at once to the client and the car becomes the property of the client at the time of the
conclusion of the contract. The price becomes a liability attached to the dhimmah of
the client. This creates problems for the Islamic banks and they are not following the
rules of the credit sale and the transfer of title. It is for the same reason that they do
not wish to use the credit-sale as a substitute for murābaḥah either.
The bank does have the right to ask for some collateral, even the hypotheca-
tion/pledging of the same car, but it can do so only when the title has first passed
to the client. Further, the imposition of penalties for delayed payments is absolutely
unlawful, even when the penalty is distributed among the poor and so on.
Islamic banking is functioning on the basis of gimmicks and evasion of the provi-
sions of Islamic law. In this situation, it can only be assigned the rule of prohibition.
Allah knows best.
Advanced Legal Studies Institute ©2012 Imran Ahsan Khan Nyazee

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