Accountancy Forum

Will anybody explain the difference b/w both these two forms of financing?

S M R

I think main difference between Muslim and non Muslims financing is interest, interest is prohibited in Islam but non-Muslims do all their business through interest (they provide the credits credit cards, loan and mortgage etc and charge interest top of that).

Your question is broad based. Please be specific as to which area you would like discussed.

I believe islamic mode of financing provides a shared basis of ownership of the venture. However, the concept of interest is forbidden from the receptients end only. We need a carefull and thorough reading of islamic legislation to understand the thrust of interest based financing.

Non Islamic financing is what we see in our country. It incorporates everything ranging from interest to bribery.

sorry friends.... A correction note

Interest is not forbidden from receptients end. It is forbidden from payers end only. Apologies, I think i need some sleep after such a long day at office.

Hi fellows!
Does any body has historical perspective on why and when interest was declared haram in islamic? Was this practice forbiden in the life of Prophet(PBUH) or did it happen later on.

Thank you

A very interesting question posed by Pervez, can anybody please answer it?

Btw... i've come across a few good essays on islamic modes of financing in the Reference section of this website which might help answering SMR's question. You ppl check them out, then we can discuss them. Just a note that they are in PDF format, so one will need acrobat reader to read them.

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Arrrgh... it sure's gonna be mighty rough sailin' today ... mates!

actually, i posted this topic bcaz i was going through the repayment schedule of a loan granted by the bank which was mentioned in the topic"Islamic Job Required", I didnt find any difference b/w that and the schedule prepared by anyother bank, oooooh yes, i found the difference the word "Interest" or "Markup" was replaced by the word"Profit",
and Pervez, a very well question raised by you, as far as i know about it, before Hazrat Muhammad (PBUH) the interest was too common while taking loans, (as in that regime every bad thing was on its extreme) most of loans were of personal natures not the business nature, (but in islam interest is haram whatever its nature is.)
if i m not correct please correct me, and i think sajjad will be in a better position of clarification, as he is tableeghi brother.

S M R

After Holy prophet (PBUH).... legislation in islam came to an end. However, few avenues were left open ranging up to IJTIHAD. Historically, interest dates back to pre Holy Prophet PBUH times. The modern shape is found in the jewish set of rules re interest based financing. It is interesting to know, that Interest is not allowed with in Jewish ocmmunity, ie jews dont charge int. to jews. however, it is prefect to other people ( as per their belifs). Well, we dont disagree with their beliefs. If this it their religious position, we respect this value. However, Islam changed it all. One needs reading Quran Pak, i think its the second SIPARA. It will be a revalution to most of my friends here, if they themself read this, rather than asking a mulvi (who are absolutly useless). If anybody has difficulty directing, please let me know and i will try and locate the precise reference. I would welcome the views of anybody who has done any research on this topic.
finally, thanks RAZA for brining up such an important topic.

Hello friends!

Now this topic really caught my interest. So thirsty as i was for knowledge i went deep into the well of internet. Wallah! This is a real mircle (God bless Al-Gore for inventing it, the joke is old but has not lost its punch line).

I started where civilization has started itself. Yes, Saddam Hussain's native country of Iraq. Even a novice of history will know that the oldest city of the world was Babylon(georaphically it was located near present day Baghdad). The king of this city by the name Hammurabi was the first person who codified the laws of urban living.
His code known as Hammurabi codes of laws was first known laws of human kind. Again the internet, you can actually read all the 200
of them on internet. I was researching if any mention was made about interest or usury in these codes. Unfortunately, the only mention is that interest arrangements should be properly documented, it is not prohibited. When i read further about the times and culture of Babylon, i found that usury was a big curse on the people of Babylon. Lenders use to charge exorbitant amount of interest from needy people.
Then i fast forwarded and tried to find out if Jews were allowed to charge interest. In fact, i found that they were not allowed to charge interest either to Jews or to Gentile.

Now i am not a religious scholar or a maulvi, but who in the world can stop me from reading the english translation of Quran. So i read the english translation by Dr. Rashad Khalifa. Loo and Behold, there is a verse in Surah AL-Nesa(4161)about Jews indulging in this practice (usuary) when this was prohibited to them.
However, this practice was so wide spread that even some of the Rabais(religious leaders) were involved in this. Infact this prohibition of interest was adopted by Christians as well. So they discouraged charging of interest by fellow christians. However, since Jews in Europe were not allowed to indulge in other trades and professions, money lending became a way of survival(unfortunately the ultimate domination in banking and finance) for Jews. Thus they adopted this modified version that you can charge interest to outsiders but not the Jews.

Then i tried to find out about usury and islam. Now i can provide the exact references if somebody wants them. I found out that interest (Riba) was prohibited in the 9th year of Hijrah. The prohibition is mentioned in Surah Al-Baqarah which is 87th in the order of revelation out of 114 (please correct me if i am wrong here). According to these sources, this surah is one of the last few revealed to our Prohphet(PBUH). Now i quote the exact verse ref 2275

"THOSE WHO CHARGE USURY ARE IN THE SAME POSITION AS THOSE CONTROLLED BY THE DEVIL'S INFLUENCE. THIS IS BECAUSE THEY CLAIM THAT USURY IS THE SAME AS COMMERCE. HOWEVER, GOD PERMITS COMMERCE AND PROHIBITS USURY"

So the sources suggest and if you read the verse even a common man can detect that this practice was in existence (although totally disliked by Prophet(PBUH). However, this verse clearly puts an end to usury for once and all.

This i believe answer to some extent my question of when, the detailed answer to why is still outstanding. However, one can clearly understand the repressive nature of interest(specially compound interest- i hope every body knows the rule of 72!!). However, not just people but some of the nations of the world had destroyed themselves by taking debt at exorbitant rates in the open market and unable to pay interest let alone the principal. Why to go too far, we were in the same boat a few years ago. Thank God we are beginning to climb out of that hole at last.

One thing i am more and more getting fascinated is the way our religion has made life simple for people and its openess and common sense that was its power base. Why do you think, my friends, a group of arab from desert went like a strom and conquered the world. It was islam's simplicity, sense of equality that was unmatched for the powers of Rome and Egypt. Alas, we lost that touch and partly i will blame the so called "thekedars of islam" who failed to grasp the modern world and islamic world at the same time. But that is a topic for some other day.

Khuda Hafiz





Edited by - Pervez on Sep 25 2003 054418 AM

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Edited by - Pervez on Sep 25 2003 065638 AM

Dear Pervez

Thanks for contributing such an important piece of your work..... However, there is a fundamental question that needs answering and you have gone to the core of it.... As per your writing of Quran,,, int., is prohibited in terms of charging....those who charge is in open war with the Allah (as per Quran)... but WHAT ABOUT for those people who pay....is there any reference in Quran that stops me from paying int.

Allah Hafiz.
zubair

Wonderful work Pervez, my hats off to you!!

This last post was simply the most intelligent piece of work i've read on this messageboard. The research work carried out in writing that post is something to be admired and should be emulated by all of us.

And thank you for pointing out that usury is forbidden in the Jewish religion. The other day i was having a heated discussion on this subject with a christian friend of mine who said that usury is allowed by the Jewish faith, and since christianity is the evolution of that faith, it also allows it.

Although i would like to correct something out in that post which although is not much related to the topic being discussed, but should be pointed out for ppl who are interested in history.

Babylon was not the oldest city in the world. The oldest recorded city and which also has the title of the oldest surviving city in the world is Damascus, the capital of Syria. It is beleived that this city was first setled around 10,000 years ago, that is in 8000 BC! Its old name 'Shaam' (the name which we still use for Syria in Urdu and Arabic) is said to be derived from the name of Noah's (Hazrat Nooh) son 'Shem'.

The biblical town of Jericho, was first settled somehwere around 7,500 BC.

The first records of settlements in the area which we call Babylon city are in 2200 BC.

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Arrrgh... it sure's gonna be mighty rough sailin' today ... mates!

Thanx pervez, nice research work, i m really impressed,
One thing is now clear to me, i had understanding that Jews are allowed to charge interest in their religion, thanx for updating me.
the thing on which i m confused, if u look at the financial institutions which claim that they are doing business according to Islamic mode of financing, but actually they are doing the same thing which a non islamic bank does. So what's the difference, I have a friend in UK, who works in Midland Bank, actually he raised the same question, he had already gone through the mode of financing by these islamic banks, he said that he is surprised that he could not find any difference b/w this financing and Normal financing,
the another interesting question raised by him was relating to a loan, i ll better be able to explain it by an example.(i have already posted the same on any other forum some months ago)
Suppose you take a loan of Rs.5,000/- today which is equivalent to 10gm of gold, the terms of repayments are that you will repay the loan after 1 year in terms of gold.
and after 1 year, the prices of gold shoot up to Rs.7000 per 10gm, now you have to repay Rs.7,000/-, what does this difference of Rs.2,000/- represents,
i replied him as this is conditional loan, there is a chance that prices of gold may go down, so u may earn gain on that.
he quoted the theory of economics"Prices are flexible to upwards and rigid to downwards".

S M R

It is a very interesting but confusing topic, i found something more on this topic so i would like to share with you all about lease financing, that how the leasing came into the pakistan,
In the early 1980s the Islamic Ideology Council gave a ruling that leasing is an Islamic mode of financing. In response to this the leasing sector started in Pakistan with the creation of NDLC (National Development Leasing Corporation).

The concept of leasing is such that the ownership of the asset is in the name of one entity who lends it to another entity in return for periodic rentals. This concept in itself is perfectly Islamic because in the earlier years people who used to own land, rented it out to others for agriculture and other purposes.

However, the problem starts when we analyze how the rent to be paid is determined in present-day leasing. A lease rental consists of two portions, one is the return of principal or the cost of the asset, the other is the profit on the transaction. The profit on the transaction is calculated using prevailing interest rates. This is different from the rental paid for a house, for example, which is determined by market forces and not by prevailing interest rates. This is where leasing looses its interest-free character.

This kind of a discrepancy is not just present in leasing alone, in our whole financial sector you will find transactions where the wording is such as to give the impression that it is a non-interest transaction but in actuality, in ESSENCE it is still interest. For example banks never charge INTEREST they charge MARKUP or RETURN or PROFIT. But what is it in real? What is the concept behind it? It is just a rent for using money-another name for INTEREST.

What do u think People????
S M R

Edited by - smraza on Sep 26 2003 013924 AM

Hello friends!
Thnks friends for your encouraging words. I would like to reply to some of the points raised by you friends.

First for Zubair, i think the material on the subject is very clear. It is not only forbidden to charge but to pay interest also. A famous Hadith says
"The Apostle of Allah (PBUH) cursed the one who accepted usury, the one who paid it, the witness to it, and the one who recorded it"

The matter is so important that Holly Prophet(PBUH) devoted considerable amount of time in his last Khutba on the issue of usury.
I quote the relevant part of the address below

"ALLAH has forbidden you to take usury (interest), therefore, all interest obligation shall henceforth be waived. Your capital, however, is yours to keep. You will neither inflict nor suffer an inequity. Allah has judged that there shall be no interest and that interest due to Abbas Ibn Abd'al Muttalib (Prophet's uncle) shall henceforth be waived.."

I was almost shocked to realize how important this practice is when i found another Hadith that says
"sin of interest dealing is thirty times more compared to the sin of
adultery"

Now for Guybrush
I have address of a very interesting website www.missionislam.com.
You have to search for section that deal with usury. There, you will find fantastic details about practice of interest in the Jewish and Christian religions. The names, dates and exact background from Torah and Bible. It will give you solid material to talk to your christian friend.
Now i agree with you that the oldest "surviving" city is Damascus. However, i was talking in the background of centres of civilization. I wanted to know how ancient civilizations dealt with this problem of interest. As you know of the three known ancient civilizations (Mesopotamia, Indus, Egypt), the first one was the oldest (www.geocities.com). They invented writing there besides many other first. As you also know that Babylon was the calling card of this civilization. It was an urban centre (huge metropolis) where people live non agricultural life. Therefore, the laws codified by Hammurabi are considered first laws of mankind. I should have used the world centre of civilization rather than city.
Thanks anyway for your correction.

I hope we will further extend this dialogue and enrich each other

Allah Hafiz


Edited by - Pervez on Sep 26 2003 051422 AM

Edited by - Pervez on Sep 26 2003 052628 AM

I think major difference is the underlying asset transactions in Islamic mode of financing and risk applicable to these transactions

Farhan Syed