Islamic Banking is Haram

Islamic Banking is Ḥarām

ByImran Ahsan Khan Nyazee

©2012 Imran Ahsan Khan Nyazee

Table of Contents1. The Prohibition of Ribā . . . . . . . . . . . . . . . . . . . . 12. Murābaḥah in Islamic Banks . . . . . . . . . . . . . . . . . . 53. 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 wordsabout leasing.

1. The Prohibition of RibāThe following rules are based on the famous tradition of ‘Ubādah ibn al-Ṣāmit (Godbe pleased with him). We will reproduce the tradition here; it is the tradition about thesix commodities:1ة، بالفض ة والفض هب، بالذ هب ﴿الذ وسلم عليه هللا صلى هللا رسول قال : قال امت الص بن عبادة وعناختلف ذا فا بيد، يدا بسواء، سواءا بمثل، مثلا بالملح، والملح بالتمر، والتمر عير، بالش عير والش ، بالبر والبر

مسلم. رواه بيد﴾ يدا كان اذا شئتم كيف فبيعوا الاصناف هذهThis 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 theṣarrāf. The commands have been highlighted in different colours in the tradition. Wewill 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 asexcess in count here. Thus, the extra 10 dinars that have to be paid as interest inthe 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 beupon 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 tohand. If these species differ, then, sell as you like, as long as it is from hand to hand.’ ” It isreported by Muslim. Al-Ṣan‘ānī, Subul al-Salām Sharḥ Bulūgh al-Marām, vol. 3, 72.

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• Ribā al-nasī‘ah or excess of delay, which arises from the use of money over time.It is also called the time-value of money. It is in reality this ribā for which ribāal-faḍl or the first type is paid (rent on money).

The rule is: B , - -.

In the figure below we show a loan transaction in which A gives 100 gold dinarsto B, which B has to pay back after one year at 10 percent interest. In the language offiqh, we may say A sells 100 dinars to B for 110 dinars on credit. It is only a differentway of describing the loan transaction in the figure. That is all we need to know fordeciding what is ribā.

100 Dinars (Gold)

100 + 10 Dinars (Gold)

A B

A pays 100 dinars to B

After one yearB pays 110 dinars to A

DELAY = ONE YEAR

When the two persons, A and B, are seen undertaking the above transaction, thefirst command of the tradition is activated, that is, بسواء سواءا بمثل، ,مثلا or “make thetwo sides equal in weight.” In other words, the extra ten dinars being paid by B isnot 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 interestis prohibited, therefore, the legal validity of Islamic banking cannot be questioned onthis basis.

After the execution of the first command of the tradition, and the removal of theinterest of 10 dinars, the transaction that remains is shown in the following figure. Ais giving 100 gold dinars to B, which B will return after a period of delay that is oneyear:

©2012 Imran Ahsan Khan Nyazee Advanced Legal Studies Institute

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100 Dinars (Gold)

100 Dinars (Gold)

A B


After one yearB pays 100 dinars to A

DELAY = ONE YEAR

This transaction activates the next command: بيد يدا or exchange the two counter-values at once, “from hand to hand.” It is this command that creates a problem forIslamic banking. If we examine the transaction closely, we find that it is nothing morethan 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 thiscommand mean that a loan cannot be given, even if no interest is charged. The answeris “Yes.” The command then spells the destruction of Islamic banking, or all bankingfor 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 abank—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 operatingin gross violation of this command of the noble tradition. We do not need detailedarguments 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 isthat 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 generalrule is the interest free loan called ḥasan, which amounts to an exemption or rukhṣah tothe general initial rule. It has the same status as the lending of utensils or other thingsthat are returned, and is permitted with a number of conditions. The foremost amongthese is that no period of repayment can be fixed—the lender can take it back the nextday 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. Theborrower may use it for anything he likes, even for business. This form of loan istreated 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 interestboth forms of ribā are found and both are prohibited. Ribā al-fadl represented by the10 dinars is prohibited, while ribā al-nasī‘ah represented by “delay” is also prohibited.

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In the next figure the third command of the tradition is illustrated. Let us assumethat the exchange rate between gold dinars and silver dirhams is one is to ten (1:10).2Thus, if A gives 100 dinars to B he 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 asfollows:

100 Dinars (Gold)

1400 Dirhams (Silver)

A B


After one yearB pays 1400 dirhams to A

DELAY = ONE YEAR

As delay is introduced into the transaction, a little refelection will show that this isan attempt to create a loan transaction with or without interest. The tradition does notbother about ribā al-faḍl in this case and says: اذا شئتم كيف فبيعوا الاصناف هذه اختلف ذا فابيد يدا كان or “When the species differ, sell as you like, as long as it is from hand tohand.” 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


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 notconcerned with such motives here, and all that the tradition says: بسواء سواءا بمثل، ,مثلاor “make the two sides equal in weight.”

2. The exchange rate today is completely different.


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MAIN CONCLUSION: The conclusion to be drawn from all the above is that notonly Islamic banking is prohibited, but all forms of banking based on the giving ofloans, and the artificial creation of money through central banks, FederalReserve or other, is prohibited. The credit system of capitalism is rejected and thisshows the real difference between Islam and capitalism.

2. Murābaḥah in Islamic BanksWe 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 murābahahcontract. In this contract, A asks B (a trader) to buy something for him from the marketand instead of charging a fee he may charge a clearly stated profit. The original contractwas one of trust and cooperation. A person trusts another’s judgement and due to hisrelations with him believes that he will deal honestly with him charging him the correctoriginal price and a reasonable profit. It is also for this reason of mutual trust that noalteration in the original price is allowed.

90 Dinars (Gold)

Wheat worth 90 Dinars

A

B

B buys wheat for A worth90 dinars from C and giveshim 90 dinars

C delivers the commodity toB and receives 90 dinars

SPOT = NO DELAY

100 Dinars (Gold)


+

10 Dinars asstated profit

C

B

A pays 100 Dinars for thewheat and the stated profitof 10 Dinars

B delivers the commodity toA 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: T , , , - .


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The second important rule implied by the texts of the jurists is: T .3

The transaction above is self-explanatory. A buys wheat from B worth for 100dinars. The original cost, which cannot be altered was 90 dinars, while the profit statedand added is 10 dinars. It is obvious that transportation and other costs can be added tothe original cost, but these have been ignored for the present purposes. The importantthing to note is that there is no delay in the transaction and it is a spot transaction.

90 Dinars (Gold)


A

B

B buys wheat for A worth90 dinars from C and giveshim 90 dinars

C delivers the commodity toB and receives 90 dinars

SPOT = NO DELAY

100 Dinars (Gold)


+

10 Dinars asstated profit

C

B

A pays 100 Dinars for thewheat and the stated profitof 10 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


DELAY = ONE YEAR

A pays 110 Dinars for thewheat. for the delay, andfor the stated profit

+10 Dinars forthe delay ofone year

+10 Dinars asstated 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 Islamicbanking in our book Murābaḥah and the Credit Sale.


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possibility, the transaction is more or less like the normal murābaḥah, except that adelay of one year is introduced.

It is well known that a person who sells on credit usually charges more tha he wouldin a sale on cash basis. The reason is that if he sells at the same price he will not receivethe same amount that he does when he sells for cash. The delay (and inflation) eatsinto this price and reduces its value. In this situation if the bank sells at the cost priceplus a stated profit, it is actually not getting the price it paid for the commodity, but aprice decreased due to delay. The benefit here is going to the client. The transactionsis, therfore, lawful.

In actual practice the bank will never agree to this transaction as it produces a lossfor the bank. We may, therefore, turn to the second possibility.

In the second possibility, the bank, in order to make a profit, doubles the statedprofit; let us say 10 for the delay and 10 being a reasonable stated profit. This is nolonger murābaḥah as it involves two profits. Even if it is assumed that the entire 20dinars may be treated as a stated profit, the contract is still unlawful as the originalcost price stands reduced due to delay (which the bank is trying to make up through anenhanced stated profit). In short, the introduction of delay into the murābaḥah contractmakes 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 thingcan be achieved with the regular credit sale in which the bank can charge more thanthe normal profit. The reason is obvious, and for that we turn to the leasing contract.

3. Leasing as a Credit-SaleMost 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 bepaid over a period of three years. The additional $3000 is for the delayed period of 3years. This is lawful according to Islamic law.

What is not lawful according to Islamic law is that the banks never transfer thetitle to the client at the time of the lease contract. Under Islamic law, the title passesat once to the client and the car becomes the property of the client at the time of theconclusion of the contract. The price becomes a liability attached to the dhimmah ofthe client. This creates problems for the Islamic banks and they are not following therules of the credit sale and the transfer of title. It is for the same reason that they donot 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 passedto the client. Further, the imposition of penalties for delayed payments is absolutelyunlawful, 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.


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Islamic Banking is Haram