By Magdy Abd Al-Shafy

(Original source: http://www.55a.net/firas/english/?page=show_det&id=260&select_page=13)

(Edited by Defending-Islam.com Staff)

Islamic banking is a kind of banking that builds its strategy on the Holy Qur’an and Sunnah. When investing your money with Islamic banking, you bring yourself closer to God's path, you can fight many social ills that result from commercial banks; you will also help in the development of your country, achieve the welfare of your society, protect your country from any foreign exploitation, show respect to your religion and fight the powers that lay a heavy hand on the neck of all the world's peoples.

Commercial or usury banks build their economy on usury which is as old as the human history. It was practiced by certain rich persons who used to lend money at high interest. These persons are now substituted with what are called Commercial banks. These banks don't differ at all from the old money-lenders. These banks trade in money, taking from one at low interest and giving that at a high interest, thus creating so many economic, social and moral crises.

It is because of these crises that all the revealed religions banned usury which is considered a heinous sin Islam. Reading some holy texts from the Holy Qur’an and the Hadiths reveals how heinous a sin usury is .

God says in the Holy Qur’an, the meaning of which is:

“Those who swallow usury cannot rise up save as he ariseth whom the devil hath prostrated by (his) touch. That is because they say: Trade is just like usury; whereas Allah permitteth trading and forbiddeth usury. He unto whom an admonition from his Lord cometh, and (he) refraineth (in obedience thereto), he shall keep (the profits of) that which is past, and his affair (henceforth) is with Allah. As for him who returneth (to usury), such are rightful owners of the Fire. They will abide therein.” (Al-Baqara: 275)

The state of the money-lender in this life is just like a man who is touched by the devil, always in trouble, thinking, deviated and completely absorbed in his affairs. And this state of his in the Hereafter is greater.

God says in the Holy Qur’an, the meaning of which is:

“O ye who believe! Fear God, and give up what remains of your demand for usury, if ye are indeed believers.” (Chapter Al-Baqara 2:278)

Verses like “…if ye are indeed believers…” further highlight the gravity of offence by exhorting people to obey if they indeed think themselves as Muslims.

The Qur’an not only puts a stop on Usury but it also encourages leniency towards the debt-ridden as a way to social upliftment.

God says in the Holy Qur’an", the meaning of which is:

“Allah will deprive usury of all blessing, but will give increase for deeds of charity: for He loveth not creatures ungrateful and wicked.” (Chapter Al-Baqara 2:276)

Usury has penetrated the very structure of our economic systems and financial institutions. The hardship has become collective. Prophet Muhammed (Salla Allahu alayhi wa Sallam) has spoken of the coming of such an age as a sign of the coming of the last day. Prophet Muhammed (Salla Allahu alayhi wa Sallam) said, “There will come an age where everybody eats usury and those who don’t will be touched by its dust.”

The Prophet (peace and blessings be upon him) has said, “If adultery and usury spread in a village, the people of that village are asking for the punishment of Allah.” The Prophet (peace and blessings be upon him) cursed usury, those who take it, write its contract and those who witness such a contract.

The effects of usury are very wide and uncountable. They have so many consequences in the long run:

Economic: Dependence on interest discourages people from working/trading to earn money and the value of work/trade is reduced. Such people won’t bother to take the trouble of running a business or risking money in trade/industry. For most of the readers this statement may not make sense (or won’t be able to relate) as they themselves are from the class of Workers or Traders (and not money-lenders).

Moral: Acceptance of Usury discourages people from doing good to one another and lend out of good will. A society which encourages interest on lending will require needy people to pay back more than he borrowed, which quite often is a source of huge burden.

Social: If interest is allowed, the rich (who are most likely to be lender) will exploit the poor (borrower). As a result, the rich become richer and the poor become poorer. This generates envy and hatred among the poor toward the rich, resulting in social disorders, conflicts and at times breeds revolutions & movements.

Islamic banking renders the solution. The rules regarding Islamic finance are quite simple and can be summed up as follows:

a)     Any predetermined payment over and above the actual amount of principal is prohibited.

Islam allows only one kind of loan and that is qard-el-hassan (literally good loan) whereby the lender does not charge any interest or additional amount over the money lent. Traditional Muslim jurists have construed this principle so strictly that, according to one commentator "this prohibition applies to any advantage or benefits that the lender might secure out of the qard (loan) such as riding the borrower's mule, eating at his table, or even taking advantage of the shade of his wall." The principle derived from the quotation emphasizes that associated or indirect benefits are prohibited.

b)     The lender must share in the profits or losses arising out of the enterprise for which the money was lent.

Islam encourages Muslims to invest their money and to become partners in order to share profits and risks in the business instead of becoming creditors. As defined in the Shari'ah, or Islamic law, Islamic finance is based on the belief that the provider of capital and the user of capital should equally share the risk of business ventures, whether those are industries, farms, service companies or simple trade deals. Translated into banking terms, the depositor, the bank and the borrower should all share the risks and the rewards of financing business ventures. This is unlike the interest-based commercial banking system, where all the pressure is on the borrower: he must pay back his loan, with the agreed interest, regardless of the success or failure of his venture.

The principle which thereby emerges is that Islam encourages investments in order that the community may benefit. However, it is not willing to allow a loophole to exist for those who do not wish to invest and take risks but rather be content with hoarding money or depositing money in a bank in return for receiving an increase on these funds for no risk (other than the bank becoming insolvent). Accordingly, under Islam, either people invest with risk or suffer loss through devaluation by inflation by keeping their money idle. Islam encourages the notion of higher risks and higher returns and promotes it by leaving no other avenue available to investors. The objective is that high risk investments provide a stimulus to the economy and encourage entrepreneurs to maximize their efforts.

c)      Making money from money is not Islamically acceptable.

Money is only a medium of exchange, a way of defining the value of a thing; it has no value in itself, and therefore should not be allowed to give rise to more money, via fixed interest payments, simply by being put in a bank or lent to someone else. The human effort, initiative, and risk involved in a productive venture are more important than the money used to finance it. Muslim jurists consider money as potential capital rather than capital, meaning that money becomes capital only when it is invested in business. Accordingly, money advanced to a business as a loan is regarded as a debt of the business, and not capital, and as such it is not entitled to any return (i.e. interest). Muslims are encouraged to purchase and are discouraged from keeping money idle so that, for instance, hoarding money is regarded as being unacceptable. In Islam, money represents purchasing power which is considered to be the only proper use of money. This purchasing power (money) cannot be used to make more purchasing power (money) without undergoing the intermediate step of it being used for the purchase of goods and services.

d)     Gharar (Uncertainty, Risk or Speculation) is also prohibited.

Under this prohibition any transaction entered into should be free from uncertainty, risk and speculation. Contracting parties should have perfect knowledge of the counter values intended to be exchanged as a result of their transactions. Also, parties cannot predetermine a guaranteed profit. This is based on the principle of 'uncertain gains' which, on a strict interpretation, does not even allow an undertaking from the customer to repay the borrowed principal plus an amount to take into account inflation. The rationale behind the prohibition is the wish to protect the weak from exploitation. Therefore, options and futures are considered as un-Islamic and so are forward foreign exchange transactions because rates are determined by interest differentials.

e)     A number of Islamic scholars disapprove the indexation of indebtedness to inflation and explain this prohibition within the framework of qard-el-hassan.

According to those scholars, the creditor advances the loan to win the blessings of Allah and expects to obtain the reward from Allah alone. A number of transactions are treated as exceptions to the principle of gharar: sales with advanced payment (bai' bithaman ajil); contract to manufacture (Istisna); and hire contract (Ijara). However, there are legal requirements for the conclusion of these contracts to be

Investments should only support practices or products that are not forbidden -or even discouraged- by Islam. Trade in alcohol, for example would not be financed by an Islamic bank; a real-estate loan could not be made for the construction of a casino; and the bank could not lend money to other banks at interest.