AOA Everyone,
Here are the some words that i got after a little search I am also in same boat guys
<b>"</b>It must be understood that when we claim that Islam has a satisfactory solution
for every problem emerging in any situation in all times to come, we do not mean
that the Holy Quran and Sunnah of the Holy Prophet or the rulings of Islamic
scholars provide a specific answer to each and every minute detail of our socioeconomic
life. What we mean is that the Holy Quran and the Holy Sunnah of
the Prophet have laid down the broad principles in the light of which the scholars
of every time have deduced specific answers to the new situations arising in their
age. Therefore, in order to reach a definite answer about a new situation the
scholars of Shariah have to play a very important role. They have to analyze
every question in light of the principles laid down by the Holy Quran and
Sunnah as well as in the light of the standards set by earlier jurists enumerated in
the books of Islamic jurisprudence. This exercise is called Istinbat or Ijtihad...
[T]he ongoing process of Istinbat keeps injecting new ideas, concepts and rulings
into the heritage of Islamic jurisprudence... <b>"</b>
---------------------------------------
The official fatw#257; (in Arabic) is reproduced in the Appendix, since the author has received
many requests by email from readers who wished to read the Arabic original and study its
specific wording. A translation of its full text follows
<i>Office of the Grand Imam, Rector of Al-Azhar</i>
<b>Investing funds with banks that pre-specify profits</b>
Dr. Hasan Abbas Zaki, Chairman of the Board of Directors of the Arab Banking
Corporation, sent a letter dated 22/10/2002 to H.E. the Grand Imam Dr.
Muhammad Sayyid Tantawi, Rector of Al-Azhar. Its text follows
"H.E. Dr. Muhammad Sayyid Tantawi,
Rector of Al-Azhar
Greetings and prayers for Peace, Mercy, and blessings of Allah
Customers of the International Arab Banking Corporation forward their funds
and savings to the Bank to use and invest them in its permissible dealings, in
exchange for profit distributions that are pre-determined, and the distribution
times are likewise agreed-upon with the customer. We respectfully ask you for the
[Islamic] legal status of this dealing.
[Signature]
He has also attached a sample documentation of the dealing between an investor
and the bank. The sample reads as follows
--------------------------------------------
The International Arab Banking Corp.
Bank
Date / / 2000 A.D.
Mr/________________ Account number ____________
Kind Greetings
This is to inform you that your account with us, in the amount of L.E.
100,000 (only one hundred thousand Egyptian Pounds) has been
renewed. For the period 1/1/2002 until 31/12/2002 A.D.
Rate of return 10% resulting in a return of L.E. 10,000
Total of deposit + return on distribution date L.E.110,000
___________
New amount, including return as of 31/12/2002 L.E.110,000
------------------------------------------
His Excellency, the Grand Imam, has forwarded the letter and its attachment for
consideration by the Council of the Islamic Research Institute in its subsequent
session.
The Council met on Thursday, 25 Sha#ban, 1423 A.H., corresponding to 31
October, 2002 A.D., at which time the above mentioned subject was presented.
After the membersâ discussions and analysis, the Council determined that
investing funds in banks that pre-specify profits is permissible under Islamic Law,
and there is no harm therein.
Due to the special importance of this topic for the public, who wish to know the
Islamic Legal ruling regarding investing their funds with banks that pre-specify
profits (as shown by their numerous questions in this matter), the Secretariat
General of the Islamic Research Institute decided to prepare an official fatw#257;,
supported by the Islamic Legal proofs and a summary of the Institute membersâ
statements. This should give the public a clear understanding of the issue, thus
giving them confidence in the opinion.
The General Secretariat presented the full fatw#257; text to the Islamic Research
Institute Council during its session on Thursday, 23 Ramadan 1423,
corresponding to 28 November 2002 A.D. Following the reading of the fatw#257;,
and noting membersâ comments on its text, they approved it.
<b>This is the text of the fatw#257;</b>
Those who deal with the International Arab Banking Corporation Bank â or any
other bank â forward their funds and savings to the bank as an agent who invests
the funds on their behalf in its permissible dealings, in exchange for a profit
distribution that is pre-determined, and at distribution times that are mutually
agreed-upon â¦
This dealing, in this form, is permissible, without any doubt of impermissibility.
This follows from the fact that no Canonical Text in the Book of Allah or the
10
Prophetic Sunnah forbids this type of transaction within which profits or returns
are pre-specified, as long as the transaction is concluded with mutual consent.
Allah, transcendent is He, said "Oh people of faith, do not devour your
properties among yourselves unjustly, the exception being trade conducted by
mutual consentâ¦" (Al-Nis#257;"29)
The verse means Oh people with true faith, it is not permissible for you, and
unseemly, that any of you devour the wealth of another in impermissible ways
(e.g. theft, usurpation, or usury, and other forbidden means). In contrast, you are
permitted to exchange benefits through dealings conducted by mutual consent,
provided that no forbidden transaction is thus made permissible or vice versa.
This applies regardless of whether the mutual consent is established verbally, in
written form, or in any other form that indicates mutual agreement and
acceptance.
There is no doubt that mutual agreement on pre-specified profits is Legally and
logically permissible, so that each party will know his rights.
It is well known that banks only pre-specify profits or returns based on precise
studies of international and domestic markets, and economic conditions in the
society. In addition, returns are customized for each specific transaction type,
given its average profitability.
Moreover, it is well known that pre-specified profits vary from time period to
another. For instance, investment certificates initially specified a return of 4%,
which increased subsequently to more than 15%, now returning to near 10%.
The parties that specify those changing rates of returns are required to obey the
regulations issued by the relevant government agencies.
This pre-specification of profits is beneficial, especially in this age, when
deviations from truth and fair dealing have become rampant. Thus, prespecification
of profits provides benefits both to the providers of funds, as well as
to the banks that invest those funds.
It is beneficial to the provider of funds since it allows him to know his rights
without any uncertainty. Thus, he may arrange the affairs of his life accordingly.
It is also beneficial to those who manage those banks, since the pre-specification
of profits gives them the incentive for working hard, since they keep all excess
profits above what they promised the provider of funds. This excess profit
compensation is justified by their hard work.
It may be said that banks may lose, thus wondering how they can pre-specify
profits for the investors.
In reply, we say that if banks lose on one transaction, they win on many others,
thus profits can cover losses.
11
In addition, if losses are indeed incurred, the dispute will have to be resolved in
court.
In summary, pre-specification of profits to those who forward their funds to banks
and similar institutions through an investment agency is Legally permissible.
There is no doubt regarding the Islamic Legality of this transaction, since it
belongs to the general area judged according to benefits, i.e. wherein there are no
explicit Texts. In addition, this type of transaction does not belong to the areas of
creed and ritual acts of worship, wherein changes and other innovations are not
permitted.
Based on the preceding, investing funds with banks that pre-specify profits or
returns is Islamically Legal, and there is no harm therein, and Allah knows best,
[signed]
Rector of Al-Azhar
Dr. Muhammad Sayyid Tantawi
27 Ramadan 1423 A.H.
2 December 2002 A.D.
----------------------------------------
The second and penultimate paragraphs of the fatw#257; hinted to the common objection to
fixing profits in the Islamic silent partnership contract (mu#8729;#257;raba). As we shall see below,
jurists often claim that there is a consensus that the principal's profit share must be
specified as a percentage of total profits -- rather than a fixed percentage of the capital.
The text of the fatw#257; hints at the view that this opinion was only an artifact of the
historical thought of Islamic jurists who developed the principle, and does not rely on any
direct injunction in Canonical Islamic Texts.
Elsewhere, Tantawi elaborated on the fatw#257;'s justification of fixing the profit share as a
percentage of the partnership's capital on moral hazard considerations 18
Non-fixity of profits [as a percentage of capital] in this age of corruption,
dishonesty and greed would put the principal under the mercy of the agent
investing the funds, be it a bank or otherwise.
In his book, Tantawi also cited similar opinions by highly respected earlier jurists,
including Abdul-Wahhab Khallaf19, Ali Al-Khafif20, and others.21 Most notable among
those quotations are the following
17 In other words regardless of whether or not profits are pre-specified, such cases of realized losses will
have to be settled in court.
When one gives his money to another for investment and payment of a known
profit, this does not constitute the definitively forbidden rib#257;, regardless of the prespecified
profit rate. This follows from the fact that disagreeing with the juristic
rule that forbids pre-specification of profits does not constitute the clear type of
rib#257; which ruins households. This type of transaction is beneficial both to the
investor and the entrepreneur. In contrast, rib#257; harms one for no fault other than
being in need, and benefits another for no reason except greed and hardness of
heart. The two types of dealings cannot possibly have the same legal status
(Ãukm).
The juristic condition for validity [of mu#8729;#257;raba] that profits are not pre-specified is
a condition without proof (dal#299;l). Just as profits may be shared between the two
parties, the profits of one party may be pre-specified⦠Such a condition may
disagree with juristsâ opinions, but it does not contradict any Canonical Text in
the Qurâ#257;n and Sunnah.
The only objection for this dealing is the condition of validity of mu#8729;#257;raba that
profits must be specified as percentage shares, rather than specified amounts or
percentages of capital. I reply to this objection as follows
⢠First This condition has no proof (dal#299;l) from the Qurâ#257;n and Sunnah.
Silent partnerships follow the conditions stipulated by the partners. We
now live in a time of great dishonesty, and if we do not specify a fixed profit
for the investor, his partner will devour his wealth.
⢠Second If the mu#8729;#257;raba is deemed defective due to violation of one of its
conditions, the entrepreneur thus becomes a hired worker, and what he
takes is considered wages. Let that be as it may, for there is no difference in
calling it a mud#257;raba or an âij#257;ra It is a valid transaction that benefits the
investor who cannot directly invest his funds, and benefits the entrepreneur
who gets capital with which to work. Thus, it is a transaction that benefits
both parties, without harming either party or anyone else. Forbidding this
beneficial transaction would result in harm, and the Prophet (P) forbade
that by saying âNo harm is allowedâ.
We now note again that this fatwa is focused on the liabilities side of banking, and even
then addresses the issue from the point of view of depositors. Indeed Tantawi (2001)
argued that the depositor/bank relationship should neither be viewed as one of
depositor/depositary nor one of lender/borrower. Either characterization of the
relationship, he admits, would render any interest payment a form of the forbidden rib#257;.
In contrast, he argued, savers take their funds to banks to invest on their behalf.
Therefore, he argued, the relationship is one of principal/agent in an investment agency,
and the juristic problem discussed above is only regarding the permissibility of fixing
profits as a percentage of capital in such investment agency. As we shall see shortly, the
rebuttal, representing the views of most jurists athe world, insists that the
relationship is initially one of deposit. Once the depositary uses the funds deposited
therein, classical jurisprudence suggests that the depositary has thus violated the simple
safekeeping duties of a fiduciary deposit, and must thus guarantee the funds for the
depositor. The deposit contract is one of trust rather than guaranty, i.e. the depositary
only guarantees funds against its own negligence and transgression, not unconditionally.
Therefore, the classical juristic argument concludes, the contract can no longer be viewed
as a deposit, and must be viewed as a loan, the latter being a contract of guaranty.
Indeed, Tantawi (2001) spends much of the book arguing that deposits at banks do not fit
the classical jurisprudence definition of âdepositsâ (wad#299;#ah), and rejects their
characterization as loans.
5. Rebuttal by the Islamic Fiqh Institute in Qatar (January 2003)
In the conclusions of the Fourteenth Session of Majlis Majma# Al-Fiqh Al- Islami in D#363;Ãa,
Qatar, January 11-16, 2003, the Azhar IRIâs characterization of dealings with
conventional banks as a legitimate investment vehicle was rejected. The following lengthy
quotation from the official conclusions of the meeting summarizes the contemporary
overwhelming-majority view on conventional banking among jurists
A. Conventional Bank functions
Banking laws forbid banks from dealing through profit and loss-sharing
investment. Banks receive loans from the public in the form of deposits, and
restrict their activities â according to lawyers and economists â to lending and
borrowing with interest, thus creating credit through lending deposited funds
with interest.
B. Conventional Bank relationship with depositors
The religious-law (shar#i) and secular-law characterizations of the relationship
between depositors and banks is one of loans, not agency. This is how general
and banking laws characterize the relationship. In contrast, investment agency is
a contract according to which an agent invests funds on behalf of a principal, in
exchange for a fixed wage or a share in profits. In this regard, there is a consensus
[of religious scholars] that the principal owns the invested funds, and is therefore
entitled to the profits of investment and liable for its losses, while the agent is
entitled to a fixed wage if the agency stipulated that. Consequently, conventional
banks are not investment-agents for depositors. Banks receive funds from
depositors and use them, thus guaranteeing said funds and rendering the contract
a loan. In this regard, loans must be repaid at face value, with no stipulated
increase.
C. Conventional Bank interest is a form of forbidden rib#257;
25 Qar#257;r#257;t wa TawÃiy#257;t Al-Dawrah Al-Rabi#at #Ashr li-Majlis Al-Fiqh Al- Islami (Decisions and conclusions of the
fourteenth session of the Islamic Jurisprudence Council), Decision #133 (7/14), pp. 20-24.
14
Banksâ interest on deposits is a form of rib#257; that is forbidden in the Qur"an and
Sunna, as previous decisions and fat#257;w#257; have concurred since the second meeting
of the Islamic Research Institute in Cairo, Muharram 1385 A.H., May 1965
A.D., attended by eighty-five of the greatest Muslim scholars and representatives
of thirty-five Islamic countries. The first decision of that conference stated
âInterest on any type of loan is forbidden rib#257;â. The same decision was affirmed
by later decisions of numerous conferences, including
... [List of conferences and Institute opinions prohibiting bank interest]
D. Pre-specification of investment profits in amount, or as a percentage of
the invested capital
It is universally accepted that interest-bearing loans differ from legal silent
partnership (mu#8729;#257;raba). In loans, the borrower is entitled to profits and bears all
losses. In contrast, mu#8729;#257;raba is a partnership in profits, and the principal bears
financial losses if they occur, as per the Prophet's (P) saying âAl-khar#257;ju bi-l-#8729;am#257;n)
profits are justified for the one bearing liability for lossesâ (narrated by Ahmad
and the authors of Sunan, with a valid chain of narration)...
Thus, jurists of all schools have reached a consensus over the centuries that prespecification
of investment profits in any form of partnership is not allowed, be it
pre-specified in amount, or as a percentage of the capital. This ruling is based on
the view that such a pre-specification guarantees the principal capital, thus
violating the essence of partnerships (silent or otherwise), which is sharing in
profits and losses. This consensus is well established, and no dissent has been
reported. In this regard, ibn Qudamah wrote in Al-Mughni (vol.3, p.34) âAll
scholars whose opinions were preserved are in consensus that silent partnership
(qir#257;#8729; or mu#8729;#257;raba) is invalidated if one or both partners stipulate a known amount
of money as profitâ. In this regard, consensus of religious scholars is a legal proof
on its own.
The council urges Muslims, as it declares this unanimous decision, to earn money
only through permissible means, and to avoid forbidden sources of income in
obedience to Allah (S) and his Messenger (P).
This opinion contains four main arguments against the correctness and the relevance of
the IRI fatw#257;, and it would be helpful at this point to summarize those arguments
1. The fatw#257; refers to banks with permissible investments, but banks are forbidden
from investing in any instruments other than interest-bearing loans and financial
instruments.
2. Characterizing the depositor/bank relationship as one of investment agency is
incorrect. The correct classical characterization is one of lender/borrower.
3. There is a consensus that all forms of bank interest are forbidden rib#257;.
4. Even if the relationship was to be considered one of investment agency (silent
partnership), pre-specification of profits in such partnerships must be in terms of a
percentage of total profits, not a percentage of capital. The moral hazard
15
argument is ignored, and the principle of return being justified by risk is
highlighted.
The first point is clearly valid. One can easily see that by focusing on the liabilities side of
banking, the IRI fatw#257;, and its predecessors, ignored the nature of bank assets, which are
legally interest-bearing loans, forbidden by all jurists as a form of rib#257;. This renders the
IRI fatw#257; not relevant for conventional banks, the investments of which are not deemed
permissible.
On the other hand, as we shall see in Section 7, and noted in the third opening quote by
Saleh Kamel, Islamic financial institutions have managed to find permissible alternatives
to bank loans that are functionally equivalent to interest-bearing loans. On the other
hand, âdepositorsâ at those institutions are not entitled to any rate of return, and
âinvestment accountâ holders are exposed to unnecessary levels of moral hazard and
adverse selection due to their exposure to losses. This problem has been solved practically
in Islamic finance by selling shares in closed-end âMur#257;baÃa fundsâ, which are essentially
securitized claims to the stream of fixed payments of principal plus interest (mark-up), in
which the only real source of risk is default risk, as in the case of interest-bearing loans.
While this solution provides some of the banking functions of pooling the resources of
many savers and diversifying the portfolio by financing multiple projects/purchases, it
falls well short of addressing all the prudential regulation standards to which banks are
subjected.
We shall return to those issues in Section 8, arguing that a combination of the lax
opinions Islamic bank jurists have adopted and the IRI opinion on pre-specification of
profits as a percentage of capital can provide a coherent framework for Islamic financial
intermediation, and reduce current agency costs in the industry. Before turning to that
issue, however, we need to review briefly the background and practice of Islamic finance.
-------------------------------------------
<b>Links</b>
http//www.ruf.rice.edu/~elgamal/files/interest.pdf
Just want to know what you guys say about this.
Thanks
Sibghat
Sallam
The prohibition of riba is mentioned in four different revelations in the Qur'an (
1) .
The first revelation emphasizes that interest deprives wealth of God's blessings. The second revelation condemns it, placing interest in juxtaposition with wrongful appropriation of property belonging to others. The third revelation enjoins Muslims to stay clear of interest for the sake of their own welfare. The fourth revelation establishes a clear distinction between interest and trade, urging Muslims to take only the principal sum and to forgo even this sum if the borrower is unable to repay. It is further declared in the Qur'an that those who disregard the prohibition of interest are at war with God and His Prophet. The prohibition of interest is also cited in no uncertain terms in the Hadith (sayings of the Prophet). The Prophet condemned not only those who take interest but also those who give interest and those who record or witness the transaction, saying that they are all alike in guilt.
(2) .
It may be mentioned in passing that similar prohibitions are to be found in the preQur'anic scriptures, although the 'People of the Book', as the Qur'an refers to them, had chosen to rationalize them. It is amazing that Islam has successfully warded off various subsequent rationalization attempts aimed at legitimizing the institution of interest.
Some scholars have put forward economic reasons to explain why interest is banned in Islam. It has been argued, for instance, that interest, being a pre determined cost of production, tends to prevent full employment (Khan 1968; Ahmad n.d.; Mannan 1970). In the same vein, it has been contended that international monetary crises are largely due to the institution of interest (Khan, n.d), and that trade cycles are in no small measure attributable to the phenomenon of interest (Ahmad 1952; Su'ud n.d.). None of these studies, however, has really succeeded in establishing a causal link between interest, on the one hand, and employment and trade cycles, on the other. Others, anxious to vindicate the Islamic position on interest, have argued that interest is not very effective as a monetary policy instrument even in capitalist economies and have questioned the efficacy of the rate of interest as a determinant of saving and investment.
A common thread running through all these discussions is the exploitative character of the institution of interest, although some have pointed out that profit (which is lawful in Islam) can also be exploitative. One response to this is that one must distinguish between profit and profiteering, and Islam has prohibited the latter as well.
Some writings have alluded to the 'unearned income' aspect of interest payments as a possible explanation for the Islamic doctrine. The objection that rent on property is considered halal (lawful) is then answered by rejecting the analogy between rent on property and interest on loans, since the benefit to the tenant is certain, while the productivity of the borrowed capital is uncertain. Besides, property rented out is subject to physical wear and tear, while money lent out is not. The question of erosion in the value of money and hence the need for indexation is an interesting one. But the Islamic jurists have ruled out compensation for erosion in the value of money, or, according to Hadith, a fungible good must be returned by its like (mithl) 'gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, like for like, equal for equal, and hand to hand ...'
(3) .
The bottom line is that Muslims need no 'proofs' before they reject the institution of interest no human explanation for a divine injunction is necessary for them to accept a dictum, as they recognize the limits to human reasoning. No human mind can fathom a divine order; therefore it is a matter of faith (iman).
The Islamic ban on interest does not mean that capital is costless in an Islamic system. Islam recognizes capital as a factor of production but it does not allow the factor to make a prior or predetermined claim on the productive surplus in the form of interest. This obviously poses the question as to what will then replace the interest rate mechanism in an Islamic framework. There have been suggestions that profit-sharing can be a viable alternative. In Islam, the owner of capital can legitimately share the profits made by the entrepreneur. What makes profit sharing permissible in Islam, while interest is not, is that in the case of the former it is only the profit-sharing ratio, not the rate of return itself that is predetermined.
It has been argued that profit-sharing can help allocate resources efficiently, as the profit-sharing ratio can be influenced by market forces so that capital will flow into those sectors which offer the highest profit sharing ratio to the investor, other things being equal. One dissenting view is that the substitution of profit-sharing for interest as a resource allocating mechanism is crude and imperfect and that the institution of interest should therefore be retained as a necessary evil. However, mainstream Islamic thinking on this subject clearly points to the need to replace interest with something else, although there is no clear consensus on what form the alternative to the interest rate mechanism should take. The issue is not resolved and the search for an alternative continues.
TBR
Wisal
Yousafzai
Muslims â I mean all those who claim Islam to be their Religion â generally believe that Allah has prohibited interest. They believe that the prohibition covers all kinds of interest on moneys borrowed or lent, by banks, other corporate bodies or individuals.
Some of the Muslim religious leaders go even to the extent of saying that working in a bank, too, is prohibited! Because, they say, it aids and abets the taking and giving of interest by the bank.
Not long ago, I found one of my own cousins quitting his secure job in a bank. He did so under the influence of the said such religious leaders. Maybe there are others like him who have quit or shunned bank jobs under the same influence.
But there may be thousands of other Muslims, the world over, working for banking institutions. How could all of them quit their jobs together? Such a step could create an economic void in the community. Going by the unwritten law of necessity, therefore, the religious leaders have come up with a solution for the Muslim bank employees.
The solution is somewhat on the lines as follow. The salaries that the employees receive, although unlawful, can be used for redemption of loans. So, what the employees should do is, take loans from their friends and use these to meet their household expenses. And then redeem the loans by means of their salaries. This process may be continued till the employees find alternate jobs.
You may think I am kidding; but I am not! I have far more respect for the Religion than to kid about it thus. When I first learnt about this âsolutionâ, I became sure that its providers are thereby only denigrating Islam. I then started seriously reflecting on the belief that Islam prohibits interest. I had doubts about it even earlier.
I wondered why the religious leaders were targeting banks and bank employees only. The entire modern-day society is subsisting on interest-based transactions. No major industry or business is
established without taking interest-based loans. And what about the substantial funds that employees â those other than working in banks, even, â receive on their retirements? The funds had got augmented through interest money getting accumulated year after year.
I then decided to study the relevant verses of the Qurâaan myself. The Qurâaan (also written as Koran) is the fundamental religious book in Islam. That Allah, and not man, is the Author of this book in original Arabic, is one of the essential articles of the Islamic Faith. It is the last of the books claiming divine authorship, and the first such one to be revealed in this Historical age. Its original text has been preserved unaltered for the last over fourteen centuries since it was revealed.
An in-depth study â extending to over 2 years â of the verses, revealed to me that the Qurâaan prohibits what it terms, in Arabic, as Ar-Riba. It revealed to me that the divine Book also duly contains a definition of the term. As per this definition, Ar-Riba is that increase in oneâs material wealth or possessions, which one unjustly gets, during any transaction, by usurping what rightly should belong to others.
The Qurâaanic injunction against Ar-Riba is, in other words, divine injunction against all economic injustices. Alongside this injunction, the Qurâaan states categorically, and significantly, that Allah has made business lawful. The two together, I believe, form the basic Islamic Principle of Economics.
I have recorded my detailed findings in an ebook entitled The Qurâaanic Concept Of Ar-Riba. Suffice it to say here for the purpose of this short article, however, that interest charged by a good reputed modern-day bank, does not fit into the Qurâaanic definition of Ar-Riba. A substantially major portion of such interest is for compensating the bank for actual expenses incurred by it. The rest, which is substantially a minor portion of the interest, constitutes the net profit of the bank.
Such profit is its rightful dues earned in the business of providing purchasing power to those who need it.
Interest as such is thus not prohibited in Islam. But if interest were taken at unjustly high rates, it would cross into the territory of Ar-Riba. It would then therefore get prohibited.
Written by Mohammad Shafiq