Friday, January 15, 2010
Islamic Economic System ~ a threat to development ?
Islamic Economic System – A Threat to Development?
Volker Nienhaus, Marburg
Volker Nienhaus, Marburg
The economic backwardness of the Muslim world since the beginning of the industrial revolution in the West in the 18th/19th century can hardly be disputed. There basically two groups of
explanations for this phenomenon:
explanations for this phenomenon:
• The first group emphasizes mentality factors and a mindset originating from the Islamic
worldview which induces behavioural patters impeding economic development.
• The second group stresses institutional factors and deficits originating from a particular
historic constellation responsible for the lack of institutions necessary for economic development.
Mentality and institutional deficits may explain the economic backwardness of the Muslim
world, by neither mindsets nor institutions are immune to change, and the present shape of
both cannot mainly be attributed to Islam. On the contrary, an economic policy based on Islamic
principles may be more conducive to economic development than the socialist experiments,
nepotism and state interventionism of past decades.
1. 'Islamic mindset' as an obstacle to economic development?
It is often argued that the Islamic worldview supports a mentality and value system which
attributes little importance to individual performance and responsibility, effectiveness and
efficiency or material wellbeing. Muslims are more concerned with the life in the hereafter.
They belief in a kind of predetermination, and all these components lead, in total, to a fatalistic
attitude which seriously obstructs economic development.
It is doubtful whether this is an accurate description of the value orientation and behaviour of
the vast majority of Muslims. But even if it could be observed in today's Muslim societies, it
is very doubtful whether it can be ascribed to the teachings of Islam. An alternative explanation
is that seclusive attitudes are a reflex and response to the experience of many generations
that individual efforts and endeavours do not pay in repressive systems.
Fatalism stands in a strange contrast to the economic teachings and ideology of Islam. The
literature on Islamic economic teachings (ranging from business ethics to systemic issues)
explicates and propagates attitudes and concepts which come close to what we would call a
social market economy. Major elements are the following:
• Everybody is obliged to cater for subsistence by his/her own labour.
• The final owner of everything is Allah. Man has only the right of use but no right to waste
or destroy it. Private property of means of production is permissible but must not be misused.
• Wealth can be acquired legitimately through work and inheritance. It should not be used
for lavish or luxury consumption, and the use for social purposes is encouraged (and rewarded
in the hereafter).
• The poor and needy have a claim to be sustained by the society. This claim is institutionalized
in the system of zakat (sometimes translated as poor due or alms tax), a compulsory
levy of 2.5% on assets and 5% or 10% on agricultural produce and earmarked for a list of
purposes initially outlined by the Prophet Muhammad and further specified by the early
caliphs.
• Prices should be just – which means that they should be formed on competitive markets.
Monopolization and hoarding lead to exploitation and must be combated.
• The monetary policy must ensure the stability of the price level.
• The fiscal policy should balance tax income and public expenditures in such a way that
the overall budget will be balanced (no deficit spending).
• The state shall provide a basic infrastructure (including a legal system) and specific public
goods but must not intervene into competitive markets.
Islamic economic teachings imply or plead for a set of institutions (private property, enterprises,
capital markets, anonymous markets, labour laws, competition, etc.) deemed crucial
for the rapid economic development which took place in the West since the 18th century.
However, such institutions either did not exist in the Muslim world until rather recently or
were not effective. Their introduction was often initiated from outside, for example in the
context of structural adjustment programmes and policy reform packages under the guidance
of the International Monetary Fund. An explanation for this phenomenon is offered in the
following section.
attributes little importance to individual performance and responsibility, effectiveness and
efficiency or material wellbeing. Muslims are more concerned with the life in the hereafter.
They belief in a kind of predetermination, and all these components lead, in total, to a fatalistic
attitude which seriously obstructs economic development.
It is doubtful whether this is an accurate description of the value orientation and behaviour of
the vast majority of Muslims. But even if it could be observed in today's Muslim societies, it
is very doubtful whether it can be ascribed to the teachings of Islam. An alternative explanation
is that seclusive attitudes are a reflex and response to the experience of many generations
that individual efforts and endeavours do not pay in repressive systems.
Fatalism stands in a strange contrast to the economic teachings and ideology of Islam. The
literature on Islamic economic teachings (ranging from business ethics to systemic issues)
explicates and propagates attitudes and concepts which come close to what we would call a
social market economy. Major elements are the following:
• Everybody is obliged to cater for subsistence by his/her own labour.
• The final owner of everything is Allah. Man has only the right of use but no right to waste
or destroy it. Private property of means of production is permissible but must not be misused.
• Wealth can be acquired legitimately through work and inheritance. It should not be used
for lavish or luxury consumption, and the use for social purposes is encouraged (and rewarded
in the hereafter).
• The poor and needy have a claim to be sustained by the society. This claim is institutionalized
in the system of zakat (sometimes translated as poor due or alms tax), a compulsory
levy of 2.5% on assets and 5% or 10% on agricultural produce and earmarked for a list of
purposes initially outlined by the Prophet Muhammad and further specified by the early
caliphs.
• Prices should be just – which means that they should be formed on competitive markets.
Monopolization and hoarding lead to exploitation and must be combated.
• The monetary policy must ensure the stability of the price level.
• The fiscal policy should balance tax income and public expenditures in such a way that
the overall budget will be balanced (no deficit spending).
• The state shall provide a basic infrastructure (including a legal system) and specific public
goods but must not intervene into competitive markets.
Islamic economic teachings imply or plead for a set of institutions (private property, enterprises,
capital markets, anonymous markets, labour laws, competition, etc.) deemed crucial
for the rapid economic development which took place in the West since the 18th century.
However, such institutions either did not exist in the Muslim world until rather recently or
were not effective. Their introduction was often initiated from outside, for example in the
context of structural adjustment programmes and policy reform packages under the guidance
of the International Monetary Fund. An explanation for this phenomenon is offered in the
following section.
2. Institutional deficits in the 'Islamic heartlands'
Islamic economics emerged only since the mid-1970s as a new academic discipline (a mixture
of positive and normative economics with a strong ideological dimension), and seemingly
teachings such as those quoted above do not adequately reflect the realities of the economic
systems of Muslim countries. In particular, they cannot explain the institutional deficits. It is
often assumed that the traditional Islamic law could neither provide an adequate protection of
individual property rights nor could it accommodate to institutional innovations and structural
changes in particular from the 18th century onwards when the industrial revolution changed
the economic and social systems in Europe and initiated an unprecedented economic development
there.
Obviously, the Ottoman Empire – which ruled most of the Islamic heartlands in the Middle
East and North Africa (MENA) – did not create adequate institutions during this crucial historical period. But this failure must not be attributed to an alleged rigidity of the traditional
Islamic law. There are other – probably much more important – explanatory factors: When the
territorial expansion of the Ottoman Empire came to a halt and the disintegration of the periphery began (in the 17th/18th century), the Ottoman rulers could no longer buy the loyalty of their governors and military leaders by the distribution of newly conquered land. Instead, they had to extract rewards from the own territory, and they adopted on a large scale a system of tax farming. In a period of retreat and decline, tax-farmers tried to maximize their income in
the short term and often set tax rates to confiscatory levels. This undermined private property
and made it irrational to build-up immobile real assets (including production facilities) exposed
to the access of the tax-farmers. It was much better to keep capital as liquid and invisible
as possible. This explains a strong preference of the entrepreneurs of that period for trade
ventures and a strong aversion against factories and industrial plants. The military and economic
decay of the Ottoman Empire in the 19th century was in sharp contrast to the industrial
revolution which spread throughout Europe. It was driven by private entrepreneurship and
private capital, and crucial institutions such as joint stock companies and capital markets developed during that period. Nothing comparable took place in the MENA region – neither in
the Ottoman heartland nor in the Arab periphery which came under European colonial control
in the 1800s.
When countries in the MENA region gained independence in the 20th century, either nepotism
in autocratic regimes or state bureaucracies in socialist systems dominated the economies and
suppressed entrepreneurial potentials (outside established elites) and hindered the emergence
of institutions essential for the functioning of competitive markets which, in turn, are the driving
force behind economic development. This changed only in the last decade when the recognition
of entrepreneurship and private property and the market paradigm became guiding
principles for economic reforms all over the world, including the MENA region.
3. The riba problem
Even if the Islamic mentality and the basic institutional setup of an Islamic economy is supportive
to development, one must not ignore one distinctive element in the Islamic economic
teachings with institutional implications which may turn out as a fundamental obstacle for
development, namely the prohibition of riba – which means all kinds of interest (and not just
usury) related to a loan. It must be noted that riba is prohibited for loan transactions only, i.e.
it is limited to purely financial transactions. A trade transaction, where one party transfers an
asset (good or non-financial service) and the other party transfers money, does not create interest
but profit. This is true even if the financial transfer happens at a later date and the seller
adds a mark-up on the spot price for the deferred payment. In this respect rent is similar to
trade. Interest is created only if both transactions are financial in nature. While interest is prohibited, profit from trade is allowed, and even in an interest-free economy capital has a price.
The sector which needed – for centuries in Islamic history – the most sophisticated forms of
finance was trade. Islamic jurists developed a comprehensive and sophisticated corpus of contracts for the financing of various types of trade transactions. All these contracts avoided interest.
The more entrepreneurial and venturous transactions (such as long distance trade expeditions)
were financed on the basis of profit and loss sharing. In more standard transactions
(especially local trade) financing was not done by interest-bearing loans but by mark-ups on
the spot price for the deferred payment of the purchased items.
When trade ventures and their financial needs became more complex, double trade techniques
were introduced. In its extreme form, two reverse trade contracts are combined in such a way
that they made interest-bearing loans commercially possible without recourse to the legally
prohibited loan contracts. In principle, in the first contract party A sells to party B an object at
a price P, and B pays the price on spot to A. In the second contract, party A immediately (re-)
purchases the same object from party B at a price of P + X, payable after a certain period of
time. Factually, party A never gave up the possession of the traded object, and party A received
a loan from B amounting to P at a fixed cost X which is interest in economic terms
(but profit from trade and deferred payment in legal terms).
Seemingly such financing techniques facilitated flourishing trade, crafts and agriculture in the
'Golden Age' of Islam – even without banks in the modern sense. However, sceptical observers
fear that a more complex modern economy without interest would be an economy without
financial intermediation and without capital markets. This, in turn, would seriously jeopardize
an economic system based on private property, entrepreneurship, and competition. The emergence of Islamic banks and interest-free financial markets over the last 30 years cannot dispel the reservations in total, but there are clearly recent trends towards a more sophisticated and efficient Islamic financial system with links to conventional national and global financial
markets.
When Islamic banking emerged in the 1970s/1980s, its proponents strongly emphasized the
profit and loss sharing techniques and portrayed an ideal economy based on equity and partnership. This economy was deemed more efficient, just and stable than the conventional capitalist and interest-based system, and it was expected that it would boost the economic development of the Muslim world after its introduction and spreading. The reality of Islamic banking did not meet the high expectations: Instead of providing capital on the basis of profit and loss sharing, Islamic banks acted as traders on behalf of their clients and bought and sold objects with mark-ups and mark-downs and rented or leased objects against fixed rental charges or leasing rates. It is debatable whether and to what extent Islamic banks applied double trade techniques. Profit and loss sharing was only applied in relation to depositors: Money paid into so-called savings or investment accounts does not receive a fixed interest but a share of the profit (or loss) of the bank. Although Islamic banks were able to meet the basic financial needs of their customers, the early system as such was incomplete, more complicated, less efficient and inferior to conventional banks due to high transaction costs.
But the number of Islamic financial institutions and their funds under management increased
rapidly since the 1990s, and more and more conventional global players such as HSBC or
Citibank and recently even Deutsche Bank joined the Islamic segment with new financial
products, separate departments ('windows') or subsidiaries. The new actors no longer restrict
themselves to the traditional financing techniques of previous centuries but have engaged
massively in financial engineering. They developed not only new interest-free banking techniques
but also instruments for interest-free capital markets (such as sukuks as alternative to
conventional bonds). Today's Islamic bankers are not worried about systemic superiority (as
were the Islamic economists in the 1970s/1980s) but are content with the legal Shariah compliance
of their new techniques and products. Their prime objective is no longer ideology but
market performance.
New interest-free tools as such hardly promote development, but efficient techniques are by
all means a necessary precondition. The replacement of outdated techniques removes some
impediments to the progress of Islamic finance and thus enhances he chances for an integration
of an Islamic economic subsystem into secular market oriented economic systems in
Muslim countries. This tendency is supported by authorities for supervision and regulation of
financial institutions and markets (= central banks, monetary authorities, etc.) in many Muslim
countries: They observe with great interest the formulation of accounting and auditing
standards issued by organizations of the Islamic finance industry (such as the Accounting and
Auditing Organization for Islamic Financial Institutions), and many of them actively participate
in the design of regulatory standards (primarily in the framework of Islamic Financial
Services Board). Both types of standards have only the legal quality of recommendations, but
these recommendations are translated into authoritative standards by governments and central
banks of an increasing number of Muslim countries.
The improvement of techniques, the refinement of accounting standards, and the regulatory
integration into existing financial systems clearly remove possible obstacles which might
originate from the prohibition of interest. It remains to be seen whether the modernized
Shariah compliant financial toolbox will be used by ideologically motivated bankers in order
to address the financial needs of new entrepreneurs, self-employed people, local communities
etc. who so far are widely neglected by conventional banks. If this happens, Islamic finance
could make a distinctive contribution towards the development of a Muslim country – even if
the overall economic system remains mainly secular.
ISLAMIC ECONOMICS ~what is wrong ?
ISLAMIC ECONOMICS, what Went Wrong?
Monzer Kahf
Historical background
Before discussing the subject of this presentation I like to make a quick review of my perception of the history of contemporary Islamic economics.
Although the word "Islamic Economics" was used for the first time by Islamic writers of the Sub-Continent in the 1940s, writing on Islamic economics date back to the thirties with the beginning of the contemporary Islamic political movement both in the Sub-Continent and the Arab world. Anwar Quraishi (1948) was perhaps the first economist who attempted to discover an Islamic Theory based on the prohibition of Riba. Since then we started having publications and research on Islamic economics by three breeds of people: socio-political activists, Shari’ah scholars with little exposure to some kind of economics and Western trained economists with little or not so little exposure to Shari’ah scholarship. Sorting these writings and publications is very important to understand the development of Islamic Economics in the second half of the past century.
The first category of writings is normally general, political oriented and condensed in the form of social and political slogans. The second category is loaded with Fiqh in both methodology and focus; with extremely few exceptions it is more of Fiqh al Mu’amalat than any economics. Lastly a considerable chunk of the writings in the third category is based on a precept of self-proclaimed distinctiveness. It is essentially the third category writings that should be the focus of our study and evaluation. Of course, there are other economic and political writings, In Arabic and Other languages of the Muslim countries, that did not claim being Islamic or associated with the Islamic ideology/economics. These are completely outside our consideration although some writers likes to group them within Islamic economics for objectives in their own hearts.
Islamic Economics:
Paradigm, discipline and independence
Is Islamic economics independent from economics? Does it make a paradigm of its own? Does it depend of a set of assumptions and analytical tools that is different from economics? Does it make a discipline of its own?
Many Islamic economists have an undoubted affirmative answer. They argue that it is independent and they take upon themselves the task of attempting to invent an "appropriate set" of tools to understand the behavior of Muslim consumer, firm, macro numbers. The fervor of this attitude was very apparent when the world of economics had two-part Apartheid: communism and capitalism. In fact, communist writers also
attempted to identify theirs as an independent paradigm while the capitalist have hidden their agenda under the plain name of "economics" for a long time.
To the Islamic religion and ideology, capitalist and communist thinking stem from a common utilitarian ideology that looks only at the human as a "homo-economicus." It is therefore natural that many Muslim economists would view a multi-dimensional motive in the behavior of women and men and would rise against the purely utility motivated man as a basic assumption of economics. This would certainly call for a paradigm that is completely different from the paradigm of economics! But although the majority of capitalistic economists hide their real assumptions behind a thin layer of "a purely rationalist science of economics," economics itself grew out of their shell to develop studies on altruism, philanthropy and other non-utilitarian motives.
Ibn Khaldun, the real founder of Economics as a branch of social studies, established his newly invented science on an absolute human basis and aimed to understand the individual and collective behavior of human beings "as they are" without imposing on them any pre-structured ideological, religious or societal assumptions. He did not have a "stigma" of distinctiveness that would have required him to "alienate himself from the rest of the human race, infidels or fidels alike. He even did not need to add a prefix "Islamic" in every sentence and before every variable and tool of analysis, although he recognizes the Divine Revelation as the Major source of knowledge. He also did not have an urge to "Islamize" the heritage of knowledge as it is handed over from one nation to another throughout history.
If we were to extend Ibn Khaldun to the subject of our debate today, we would find him discussing "economics" without being afraid to loose his identity; he would accept or reject theories and assumptions on their own merits and according to their reflection of the behavior of women and men, in their individual endeavors (micro) as well as in their association together (macro) on the basis of the "totality" of human beings without departmentalization or segmentation; he would also be able to criticize the established or accumulated ‘economics’ on the basis of its deficiency of its basic utilitarian assumption that ignores other intrinsic human motives.
From the point of view of the Khaldunian social science, Economics is itself Islamic Economics without having to use the "prefix" and without shying from criticizing the established capitalist wisdom (and/or the communist quasi-wisdom) as being partial and inadequate.
The Discipline
On the other hand, the looseness of our economic jargon gives room for terms like ‘capitalist economics,’ ‘socialist economics,’ ‘communist,’ ‘welfare’ and what-not economics. These are in fact studies of branches of economics that make a subset of the whole but they have their own assumptions and peculiarities. They include the study of an economic system within certain ideological and legal framework and the study of the individual and collective behavior of the units within the system.
Islamic economics is also looked at as the study of the individual behavior of units and of the macro variables within the legal and ideological framework created/envisioned by Islam.
Some people may like to question whether Islam has a legal and ideological framework of a society. I take this issue as outside the scope of this meeting and put it in the following form: Islamic economists, along with a great number of Muslims believe that Islam set forth a socio-political-cum-legal framework of a society in addition to is ideological foundation based on the belief in the Oneness of God and the imperative nature of His Revelation.
Accordingly, Islamic economics is a branch of economics that studies the units and variables within the Islamic legal and ideological framework, actual or assumed.
Over Statements
It is natural in any new endeavor to see some professionals carried out to different kinds/levels of exaggeration. In Islamic economics, we have our full share of overstatements. You find such things in writings that deal with the factors of production where terms such as ‘Islamic capital’ ‘Islamic labor’ Islamic land and ‘Islamic production function’ are used. You also find writings that deny renting of land and physical capital because as an extension of the prohibition of interest, being pre-determined fixed return on capital. You will also find overstatement of the uniqueness of the Islamic market on the ground that it is a market that is pure of cheating, fraud and monopoly, not realizing that any reasonably competitive market is also void of such practices. These kinds of exaggeration are usually short-lived as they cannot stand critical evaluation.
Islamic Economic System
In the short history of contemporary Islamic economics, we also encounter two other interesting phenomena: an overstatement of the uniqueness of the objectives of the Islamic Economic system, and a mix up or confusion of principles and tools of analysis.
Driven by a sense of idealism, some of us attribute a special status to the general objectives of the Islamic economic system: Full employment, satisfaction of basic human needs, economic-cum distributive justice, development or improvement in the quality of economic life, economic power, etc. But a closer examination of these objectives indicates us that they are the same for each and all economic systems as usually expressed in their econo-political rhetoric throughout the human history. More specifically, these objectives are also the core objectives of socialism, communism and capitalism even anarchism and all or "isms." The same also arises with regard to the institutions of market, factors of production and the principle of government intervention whereby some Islamic economists try to draw a so called "Islamic" picture that is very different from the conventional wisdom that is common to other economic systems.
This is not to deny a certain uniqueness of the Islamic economic system. This uniqueness is founded on the principles of Islam as a revealed religion as they strike a balance way of life that is not tilted in either direction. A uniqueness that lies essentially in two things:
The explicit acceptance of the Divine Revelation as a source of knowledge and certain detailed pivotal institutions such as the prohibition of Riba (interest), the private-public mix of property/ownership, the spiritual-material mix of success, Zakah, Awqaf, etc. in other words, while the general objectives and the tools of analysis of Islamic economics are the same in economics itself, the some aspects of the institutional setting of the Islamic economic system are different, or the means this system uses to reach the common goals are not exactly the same as in other system the utilitarian capitalist which is generally given the name economics and the utilitarian communist which is dictatorial by definition.
Another important area of uniqueness of the Islamic economic system must be brought out explicitly. It is the moral characteristic of its articulation, on both the principles’ level and the level of the practical rules and regulations. This moral characteristic makes a boundary of the accessible set of actions/decisions/ behaviors of the economic unit. The economic unit in the Islamic system is equipped with the ability to judge possible courses of action on moral grounds, the same way one finds in all societies and systems but to this the Islamic system adds an external screen apparatus that is manifested in the set of morally-based rules of do and dot to do that takes the form of the Shari’ah or the Islamic law. Some of Islamic economists call this characteristic "the moral internal and external screening." We must realize, however, that the Shari’ah based morality includes items that are not conventionally taken as moral matters such as ‘pork production’ but we must also realize that the contemporary moral standards of the capitalist utilitarian societies is subject to an accelerating dynamism that associate relativity to all conventional morals.
Moreover, the Islamic economists also argue that because of it is sourced out in the Divine Revelation, the Islamic economic system is balanced in a way that brings it closer to the human nature (al Fitrah). Accordingly, you will find in it apparent similarities to certain aspects of other economic systems because undeniably the latter are the product of human mind/experience mix.
Consequently, it is normal that the means to reach the common goals, in the Islamic economic system, include a free market-exchange with emphasis on honoring consensual contracts (some will see it as à la capitalist free market), prohibition of monopoly (à la interventionism), great concern about the satisfaction of the basic human needs and about economic justice (à la socialism) and assignment of a substantial chunk of natural resources to the whole society as represented by its government (à la communism). Add to it all, the prohibition of interest that denies any rewardability to most of the purely financial transactions unless it is formed as means of production and thus deprives them from the functionality that is conventional in the capitalist framework.
Islamic Banking:
Is it a System or a Beginning of a Change? Where is it Heading?
Once upon a time, when the movement of Islamic banking started in the 1970s there were professional economists who saw in it a totally new economic system that does not only restructure the economy but the whole society as well. Some writings envisaged Islamic
banking as a different system of motivation for saving and investment as well as a dreamed solution of bridging the gap caused by the saving/investment dichotomy. The biggest blow to these writings came from the fact that Islamic banks came to blend and co-exist within a conventional system of banking, making no economic revolution and upsetting nothing in the prevalent economic equations. Islamic banks, whether commercial or investment, actually took the same shape and approach that are adopted by their interest-based counterpart, to the extend that they can be loaded with the same criticism addressed to conventional banks, ‘they give the umbrella when it is shining and take it back when it rains or the give the cake to the rich and nothing to the poor.’ In fact, there are professionals, within the ranks of Islamic economists, who still argue that the experiment of Mit Ghamr was not merely an attempt of an early version of "banks for the poor, the Islamic way" but it was the true form of Islamic banking that was brought to an end by the conspiracy and conspirators!1
Another frustration was the outcome of a large gap between theory and practice. Is it a disobedient practice or a misguided theory? The problem of Islamic banks is that they were born in a milieu of two extremely polaristic paradigms: the reality of interest-based conventional banks that came to take its present shape after more than four centuries of natural development, growth and boundary expansion and the idealistic fictitious theorization that imagined a framework of Islamic banking on the basis of a simplistic Mudarabah and two tier Mudarabah. Writings in Islamic banking preceded the actual establishment of the first such bank by nearly two decades.2 Throughout this period, most of our emphasis was on Mudarabah as the "Islamic" trademark of banking, Ju’alah and Wakalah were also presented by some writers, but when the early Islamic banks were born they had to wait for two years to start any banking business until the "Murabahah to the purchase orderer" was invented!3 Is it only a case of mismatch? Did Islamic banks go astray and deviated from their presumed course? Or was the theory wrong?
Until today, many Islamic economists insist on their Mudarabah theory and pray to God that Islamic banks come back to their lap! They will not. . . It is not a case of miscarriage or birth defect but of an erroneous unrealistic pre-nuptial theory that was formulated in isolation of banking experience. Islamic theory was born before Islamic banks and delivered by non-specialized idealists. The first reference to the inadequacy of Mudarabah in fund utilization came with the survey of Saudi small businesses that indicated a preference for Murabahah; and Islamic economists started recognizing the risk of Mudarabah and its stringy institutional requirement only in the late nineties and the new century with the rise of concern about risk analysis in Islamic banks! This is inspite of the tremendous success Mudarabah encountered in funds mobilization.
This brings us close to the controversy of whether the Islamic banks are mere financial intermediaries or direct actors in the real (physical) market. Although many Islamic economists started to incline toward the intermediary idea, most Islamic bankers argue for larger authority. The nature of Islamic financing requires Islamic banks to make
transactions in physical goods and services, but while many of us like to see them done only on initiatives from businesses that need financing, Islamic bankers cling to holding larger authority.4 I think Islamic banks have to be restricted to an financial intermediary role only, otherwise the conditions of competitiveness in the market should be reconsidered and a signorage charge has to assessed for the right to accept deposits and issue credit.
We also find professional writings in Islamic economics that load Islamic banks with a social philanthropic role that uniquely singles them out from among all the economic units. While all economic units are expected to participate in philanthropy, and they actually do whether for altruistic or public relations reasons, charging the Islamic banks with a unique social role that is not required from their conventional counterpart nor from other businesses puts them in an uncompetitive position. In fact, the actual practice of Islamic banks indicates that the majority of them do not interfere even in the payment of the obligatory Zakah for their shareholders let alone the depositors, and the amount of charitable and other donations they give is very trivial compared with their revenues, net profit or assets.
There are also writings that want to deprive the Islamic banks from the right to issue credit through the process of demand deposits creation caused by the partial reserve system. They argue that the demand deposits in Islamic banks should take the legal form of ‘Wadi’ah’ as known in the Fiqh with a slight change that is implied in physically putting all deposits in one vault and using checks and transfers to manipulate them. Some writings reinforce their view by the argument that since the Shari’ah calls for monopolizing the issuance of currency (minting gold and silver coins) in the hand of the government, money creation in all forms including the creation of credit as demand deposits should be strictly held in the hands of the government through a 100% reserve system.
Once more, to the dismay of these writings, the short history of Islamic banks and the development of Fiqh positions on demand deposits took a completely different direction: Demand deposits are treated as loans in order to justify the 100% guarantee for the principal of deposits’ and loans do not require preserving a physical presence of lent assets. On the other hand, central banks apply the same rules of partial reserves to Islamic conventional banks alike. Additionally, the theoretical argument for full reserves is itself borrowed from conventional economics; it is controversial, socially costly and anti the trend of Fitra (that has been the actual real-life basis on which the creation of credit relied) that is growing now toward creating electronic credit in the form of means of payment.
Then comes the latest frustration in the form of the recently prevalent Tawarruq. Regardless of whether it is permissible or not and regardless of what conditions the Shari’ah compatibility may impose on it, Tawarruq brings the whole Islamic banking theory to square 1. The Essential virtue of Islamic banking that is so much elevated by the most liberal Islamic economists is that Islamic Financing has to be stick to the real market transactions and it does not allow for the provision of cash. Now, this new Tawarruq, domestic and international, provides cash at a higher cost than interest.
The last two points that I want to raise about Islamic banking are related to justice between share holders on one hand and the depositors on the other hand; and the effect of globalization. While the present system of Islamic banks runs Shari’ah compatible contracts, it leaves out in the air the effect of the negotiation power on the final products of such contracts. In fact, banks in general and Islamic banks in particular have, much more negotiation power than their contractors under normal circumstances This is one of the theoretical reasons for regulating the banking industry. Islamic banks are left alone to determine the share of profit distribution between depositors and share holders and reap, alone too, the profit that is generated from the investment of demand deposits. Additionally, although owners of Mudarabah deposits share the risk with the bank they are left up in the cold when it comes to the management of the bank. These elements together have created a clear disparity between the rate of profit of distributed to share holders and that given to depositors.
To face any potential side effects of Globalization, Islamic banks were expected to integrate and consolidate. The reality over the last three years indicates that although the total number and aggregate size of Islamic banks increased, there average size remained virtually stagnant. There are indications of deepening their markets and improving the services they provide especially in countries that have more than one Islamic bank. But it seems that merger and unification are not taking their toll in the Islamic banking industry!
All the above requires a revision of the theory of Islamic banking to reassess its functioning and whether it is really distinct from the conventional theory!
Strategic Focus of Islamic Economists, Was it correct?
Since the rebirth of Islamic economics, writers have been busy talking about Islamic banking and finance, Islamic modes of finance, development models derived from the Western models of the sixties and seventies and lately models for corporate finance that copy the American studies in this area.
For such a long time we tried to convince ourselves that the real road to development is through the Islamization of the banking sector. We were overtaken by making it founded on the double-tier Mudarabah to the extent that we spent a considerable amount of ink and paper, and probably energy too, on the issues of Murabahah and Mudarabah while the real practice of Islamic banks has been drifting toward Tawarruq! It was a beautiful illusion for which we neglected the main concerns of our societies as well as the core of Islamic economics: the socio-political requisites of economic development. We even neglected the basic institutions of the Islamic economic system.
For apparent reasons, we concentrated our effort on developing Islamic banking, and they grew to an extent that may make them a monster that destroys the purity of the economic thinking of our elite activists. Islamic banks banking and finance also consumed the
abilities of the elite Shari’ah specialists as if it was the most important issue of the life of our generation. I still remember the cry, about two decades ago, of one Islamic economist for the need to discuss issues in the Islamic political economics, it went with very little response!
It was only recently that a few Islamic economists started dealing with issues of development, political economics of the role of government and of the economics of poverty reduction inspite of the lip service to these issues we find in a few generalist writings that are spayed over the past five decades of Islamic economic. Additionally, the institutional setting of the Islamic economic system and the role of the non-profit sectors have just started to be recognized as important fundamentals of Islamic economics.
There is a serious need for re-examining the existing writings on Islamic economics and to see whether it is acceptable to permit the past trend to take its hold on the future of Islamic economics. There is a need to shift our focus to studying the economics of poverty in the Ummah and how to recruit the economic rhetoric to become an instrument of change and to develop a new generation of our traditional socio-economic institutions to would help reconstruct the interaction between the human element and the organizational setting in a way that creates an environment of development and growth.
The thinking of Islamic economists must lead the Shari’ah specialists to develop structures and rulings that motivate and regulate such reformed institutions instead of being led by, and restrictively limited to, the boundaries developed by scholars who applied the principles of Shari’ah to their socio-economic atmosphere a thousand years ago! The richness of our Shari’ah lies in its ability to respond to changing circumstances and "modes of production" on the basis of its overwhelmingly powerful and universal principles and guiding rulings.
Islamic economics’ Institutions:
There are two kinds of institutions in any society: institutions that are inculcated within the souls of women and men that make them pursue a futurist pattern of behavior construed to create more and more material welfare for every body in one’s environment, like the spirit of Omar Bin al Khattab who had always kept looking for improvements in every things and on all fronts. These are the within institutions that make a necessary condition for development. They are similar to the internal screening of Chapra but they are developmental in nature while Chapra talked only about a moral control screen.
The other type of institutions makes the sufficient condition. They are manifested in the external organizational setting that enables the human element to implement its developmental ideas and plans. These institutions include the rule of law, the right of private ownership and private growth, role of women, the setting of the third sector, the charity, that covers the organization of non-exchange transfers including the role of Zakah and Awqaf. While the second type of institutions is very important and is normally regulated by law, all of its components have internal reflects.
In the writings on Islamic economics over the last half a century, we’ve neglected both types of institutions as well as the internal reflect of the latter. We did not give adequate attention to building developmental mentality and spirit; we did not emphasize the ethics of thrift, perfection and growth of which our religion is the richest of all religions on earth. We’ve always thought that what matters is –by an act of law- eliminating Riba and that will do the needed miracle, all of it.
Although we’ve studied the minute details of the institution of the prohibition of Riba especially from a legalistic point of view, we did not gave enough time to studying the institution of Private ownership or the economic role of woman in the Muslim society. We shied away from scientifically criticizing the status qua because we did not want to be thought of as generalists or Islamic activists. We neglected a major factor of the vicious circle of backwardness, women left behind of development, and even some of us thought of it as an Islamic pride!
The external institutions of Zakah and Awqaf have recently received some of our grace but unfortunately with very little original thinking and a lot of third Hijri century formulation. We dared not rethinking these institutions under contemporary setting. Instead we assimilated the traditional Fiqh of these two institutions with little attention to changing circumstances, forms of assets, modes of production and the changing functions and functionaries of money.
The Zakah and Awqaf institutions we think of today are exactly the same that were applied when agriculture was irrigated by "the Saniyah" and a nice person is appointed as a Mutawalli regardless of the invention of the concept of corporation!
Institutional restructuring requires fresh innovative thinking that is only restricted by the necessary uncontroversial implication of the Revealed Truth. We need to revitalize the functions of the two pillars of the third sector, Awqaf and Zakah, in a way that makes them fulfill in a contemporary system, their envisioned role as they did in a simple economy in the past; and we need to integrate their functions within the overall framework of the Islamic economic system and philosophy.
Public Finance: Why Did we Miss Creating a Theory
Public finance is the part of Islamic social studies that historically received more attention than any other part of Islamic economics. Detailed discussions of public revenues and public expenditures are available in the classical Fiqh and Fatwa writings. Here again a question arises: Did we fail in establishing a general theory of public finance within an Islamic economic framework? The dust around the idea of whether taxation is permissible or not and under what conditions is not yet settled. Also not settled are the debates of private ownership protection against the government, rights of the poor in the public properties and revenues, the functions of taxes, economic or financial, and the restrictions on the economic role of the government.
The Public Finance area is probably the richest of all sub-branches of Islamic economics, yet most writings in this area are heavily influenced by the Western training of the writers and rarely have direct links to the original sources of the Islamic religion or to the
fundamental classical writings on public finance. We need to develop a general theory of taxation and government in Islamic economics that is based on the sources of knowledge of the Islamic economic system and that looks critically at the classical writings on the subject.
Future of Islamic Economics
Seeing it as a teaching discipline and a job-creating platform in the academia and the research centers, Islamic economics is there to stay and expand. In fact, the amount of accumulated knowledge in Islamic economics warrants a full fledge teaching program that can afford undergraduate as well as post graduate studies and degrees.
However, when we take a closer examination at the existing status of Islamic economics we see a mission unaccomplished. There is a need to set clear demarcation lines between Islamic economics and finance on one hand and Islamic Fiqh, especially the Mu’amalat, on the other hand. There is a need to measure the size of Islamic economics and stop being pretentious and as pointed out earlier in this paper there is also a need for more rigorous research in several critical areas of Islamic economics.
Islamic economics is a new but definitely fast growing field of economics. Its trade mark, the non-presence of interest, is not only unique but also affords it a claim of innovation. It has an integrated institutional structure. All it currently needs is that its promoters should wise up and tighten up their theoretical vigor.
On the applied side, it is certainly incorrect to attribute to Islamic economics any of the claims and ineffectiveness of political leaders and dictators of some Muslim countries. Besides, Islamic economists did not provide any agenda for political economics founded or derived from their branch of human knowledge inspite of the need for such an agenda.
It seems to me that the present generation of Islamic economists is exhausted and already consumed in the activities of Islamic banking and finance that the best it can do is to hand over the torch to a second generation that may carry deeper theoretical analysis and fill the gaps left by our generation.
1 The same way they defend the flunked ‘Islamic investment companies’ as the victim of conspiracy!
2 The earliest written formulation came about in 1956, and the first Islamic banks started operation in 1974.
3 Some of them went on real estates speculative trading (non-banking business) that almost wiped out a great part of their assets.
4 The new Islamic banking act (2003) in Kuwait admits in its explanatory memorandum that Islamic banks are mere financial intermediaries but the law itself allow them to initiate direct non-financial business on their own or on behalf of their clients. The compromise came is preventing real estates trades and in subjecting such transactions to the control and supervision of the central bank that is granted authority to impose limitations and restrictions.
Monzer Kahf
Historical background
Before discussing the subject of this presentation I like to make a quick review of my perception of the history of contemporary Islamic economics.
Although the word "Islamic Economics" was used for the first time by Islamic writers of the Sub-Continent in the 1940s, writing on Islamic economics date back to the thirties with the beginning of the contemporary Islamic political movement both in the Sub-Continent and the Arab world. Anwar Quraishi (1948) was perhaps the first economist who attempted to discover an Islamic Theory based on the prohibition of Riba. Since then we started having publications and research on Islamic economics by three breeds of people: socio-political activists, Shari’ah scholars with little exposure to some kind of economics and Western trained economists with little or not so little exposure to Shari’ah scholarship. Sorting these writings and publications is very important to understand the development of Islamic Economics in the second half of the past century.
The first category of writings is normally general, political oriented and condensed in the form of social and political slogans. The second category is loaded with Fiqh in both methodology and focus; with extremely few exceptions it is more of Fiqh al Mu’amalat than any economics. Lastly a considerable chunk of the writings in the third category is based on a precept of self-proclaimed distinctiveness. It is essentially the third category writings that should be the focus of our study and evaluation. Of course, there are other economic and political writings, In Arabic and Other languages of the Muslim countries, that did not claim being Islamic or associated with the Islamic ideology/economics. These are completely outside our consideration although some writers likes to group them within Islamic economics for objectives in their own hearts.
Islamic Economics:
Paradigm, discipline and independence
Is Islamic economics independent from economics? Does it make a paradigm of its own? Does it depend of a set of assumptions and analytical tools that is different from economics? Does it make a discipline of its own?
Many Islamic economists have an undoubted affirmative answer. They argue that it is independent and they take upon themselves the task of attempting to invent an "appropriate set" of tools to understand the behavior of Muslim consumer, firm, macro numbers. The fervor of this attitude was very apparent when the world of economics had two-part Apartheid: communism and capitalism. In fact, communist writers also
attempted to identify theirs as an independent paradigm while the capitalist have hidden their agenda under the plain name of "economics" for a long time.
To the Islamic religion and ideology, capitalist and communist thinking stem from a common utilitarian ideology that looks only at the human as a "homo-economicus." It is therefore natural that many Muslim economists would view a multi-dimensional motive in the behavior of women and men and would rise against the purely utility motivated man as a basic assumption of economics. This would certainly call for a paradigm that is completely different from the paradigm of economics! But although the majority of capitalistic economists hide their real assumptions behind a thin layer of "a purely rationalist science of economics," economics itself grew out of their shell to develop studies on altruism, philanthropy and other non-utilitarian motives.
Ibn Khaldun, the real founder of Economics as a branch of social studies, established his newly invented science on an absolute human basis and aimed to understand the individual and collective behavior of human beings "as they are" without imposing on them any pre-structured ideological, religious or societal assumptions. He did not have a "stigma" of distinctiveness that would have required him to "alienate himself from the rest of the human race, infidels or fidels alike. He even did not need to add a prefix "Islamic" in every sentence and before every variable and tool of analysis, although he recognizes the Divine Revelation as the Major source of knowledge. He also did not have an urge to "Islamize" the heritage of knowledge as it is handed over from one nation to another throughout history.
If we were to extend Ibn Khaldun to the subject of our debate today, we would find him discussing "economics" without being afraid to loose his identity; he would accept or reject theories and assumptions on their own merits and according to their reflection of the behavior of women and men, in their individual endeavors (micro) as well as in their association together (macro) on the basis of the "totality" of human beings without departmentalization or segmentation; he would also be able to criticize the established or accumulated ‘economics’ on the basis of its deficiency of its basic utilitarian assumption that ignores other intrinsic human motives.
From the point of view of the Khaldunian social science, Economics is itself Islamic Economics without having to use the "prefix" and without shying from criticizing the established capitalist wisdom (and/or the communist quasi-wisdom) as being partial and inadequate.
The Discipline
On the other hand, the looseness of our economic jargon gives room for terms like ‘capitalist economics,’ ‘socialist economics,’ ‘communist,’ ‘welfare’ and what-not economics. These are in fact studies of branches of economics that make a subset of the whole but they have their own assumptions and peculiarities. They include the study of an economic system within certain ideological and legal framework and the study of the individual and collective behavior of the units within the system.
Islamic economics is also looked at as the study of the individual behavior of units and of the macro variables within the legal and ideological framework created/envisioned by Islam.
Some people may like to question whether Islam has a legal and ideological framework of a society. I take this issue as outside the scope of this meeting and put it in the following form: Islamic economists, along with a great number of Muslims believe that Islam set forth a socio-political-cum-legal framework of a society in addition to is ideological foundation based on the belief in the Oneness of God and the imperative nature of His Revelation.
Accordingly, Islamic economics is a branch of economics that studies the units and variables within the Islamic legal and ideological framework, actual or assumed.
Over Statements
It is natural in any new endeavor to see some professionals carried out to different kinds/levels of exaggeration. In Islamic economics, we have our full share of overstatements. You find such things in writings that deal with the factors of production where terms such as ‘Islamic capital’ ‘Islamic labor’ Islamic land and ‘Islamic production function’ are used. You also find writings that deny renting of land and physical capital because as an extension of the prohibition of interest, being pre-determined fixed return on capital. You will also find overstatement of the uniqueness of the Islamic market on the ground that it is a market that is pure of cheating, fraud and monopoly, not realizing that any reasonably competitive market is also void of such practices. These kinds of exaggeration are usually short-lived as they cannot stand critical evaluation.
Islamic Economic System
In the short history of contemporary Islamic economics, we also encounter two other interesting phenomena: an overstatement of the uniqueness of the objectives of the Islamic Economic system, and a mix up or confusion of principles and tools of analysis.
Driven by a sense of idealism, some of us attribute a special status to the general objectives of the Islamic economic system: Full employment, satisfaction of basic human needs, economic-cum distributive justice, development or improvement in the quality of economic life, economic power, etc. But a closer examination of these objectives indicates us that they are the same for each and all economic systems as usually expressed in their econo-political rhetoric throughout the human history. More specifically, these objectives are also the core objectives of socialism, communism and capitalism even anarchism and all or "isms." The same also arises with regard to the institutions of market, factors of production and the principle of government intervention whereby some Islamic economists try to draw a so called "Islamic" picture that is very different from the conventional wisdom that is common to other economic systems.
This is not to deny a certain uniqueness of the Islamic economic system. This uniqueness is founded on the principles of Islam as a revealed religion as they strike a balance way of life that is not tilted in either direction. A uniqueness that lies essentially in two things:
The explicit acceptance of the Divine Revelation as a source of knowledge and certain detailed pivotal institutions such as the prohibition of Riba (interest), the private-public mix of property/ownership, the spiritual-material mix of success, Zakah, Awqaf, etc. in other words, while the general objectives and the tools of analysis of Islamic economics are the same in economics itself, the some aspects of the institutional setting of the Islamic economic system are different, or the means this system uses to reach the common goals are not exactly the same as in other system the utilitarian capitalist which is generally given the name economics and the utilitarian communist which is dictatorial by definition.
Another important area of uniqueness of the Islamic economic system must be brought out explicitly. It is the moral characteristic of its articulation, on both the principles’ level and the level of the practical rules and regulations. This moral characteristic makes a boundary of the accessible set of actions/decisions/ behaviors of the economic unit. The economic unit in the Islamic system is equipped with the ability to judge possible courses of action on moral grounds, the same way one finds in all societies and systems but to this the Islamic system adds an external screen apparatus that is manifested in the set of morally-based rules of do and dot to do that takes the form of the Shari’ah or the Islamic law. Some of Islamic economists call this characteristic "the moral internal and external screening." We must realize, however, that the Shari’ah based morality includes items that are not conventionally taken as moral matters such as ‘pork production’ but we must also realize that the contemporary moral standards of the capitalist utilitarian societies is subject to an accelerating dynamism that associate relativity to all conventional morals.
Moreover, the Islamic economists also argue that because of it is sourced out in the Divine Revelation, the Islamic economic system is balanced in a way that brings it closer to the human nature (al Fitrah). Accordingly, you will find in it apparent similarities to certain aspects of other economic systems because undeniably the latter are the product of human mind/experience mix.
Consequently, it is normal that the means to reach the common goals, in the Islamic economic system, include a free market-exchange with emphasis on honoring consensual contracts (some will see it as à la capitalist free market), prohibition of monopoly (à la interventionism), great concern about the satisfaction of the basic human needs and about economic justice (à la socialism) and assignment of a substantial chunk of natural resources to the whole society as represented by its government (à la communism). Add to it all, the prohibition of interest that denies any rewardability to most of the purely financial transactions unless it is formed as means of production and thus deprives them from the functionality that is conventional in the capitalist framework.
Islamic Banking:
Is it a System or a Beginning of a Change? Where is it Heading?
Once upon a time, when the movement of Islamic banking started in the 1970s there were professional economists who saw in it a totally new economic system that does not only restructure the economy but the whole society as well. Some writings envisaged Islamic
banking as a different system of motivation for saving and investment as well as a dreamed solution of bridging the gap caused by the saving/investment dichotomy. The biggest blow to these writings came from the fact that Islamic banks came to blend and co-exist within a conventional system of banking, making no economic revolution and upsetting nothing in the prevalent economic equations. Islamic banks, whether commercial or investment, actually took the same shape and approach that are adopted by their interest-based counterpart, to the extend that they can be loaded with the same criticism addressed to conventional banks, ‘they give the umbrella when it is shining and take it back when it rains or the give the cake to the rich and nothing to the poor.’ In fact, there are professionals, within the ranks of Islamic economists, who still argue that the experiment of Mit Ghamr was not merely an attempt of an early version of "banks for the poor, the Islamic way" but it was the true form of Islamic banking that was brought to an end by the conspiracy and conspirators!1
Another frustration was the outcome of a large gap between theory and practice. Is it a disobedient practice or a misguided theory? The problem of Islamic banks is that they were born in a milieu of two extremely polaristic paradigms: the reality of interest-based conventional banks that came to take its present shape after more than four centuries of natural development, growth and boundary expansion and the idealistic fictitious theorization that imagined a framework of Islamic banking on the basis of a simplistic Mudarabah and two tier Mudarabah. Writings in Islamic banking preceded the actual establishment of the first such bank by nearly two decades.2 Throughout this period, most of our emphasis was on Mudarabah as the "Islamic" trademark of banking, Ju’alah and Wakalah were also presented by some writers, but when the early Islamic banks were born they had to wait for two years to start any banking business until the "Murabahah to the purchase orderer" was invented!3 Is it only a case of mismatch? Did Islamic banks go astray and deviated from their presumed course? Or was the theory wrong?
Until today, many Islamic economists insist on their Mudarabah theory and pray to God that Islamic banks come back to their lap! They will not. . . It is not a case of miscarriage or birth defect but of an erroneous unrealistic pre-nuptial theory that was formulated in isolation of banking experience. Islamic theory was born before Islamic banks and delivered by non-specialized idealists. The first reference to the inadequacy of Mudarabah in fund utilization came with the survey of Saudi small businesses that indicated a preference for Murabahah; and Islamic economists started recognizing the risk of Mudarabah and its stringy institutional requirement only in the late nineties and the new century with the rise of concern about risk analysis in Islamic banks! This is inspite of the tremendous success Mudarabah encountered in funds mobilization.
This brings us close to the controversy of whether the Islamic banks are mere financial intermediaries or direct actors in the real (physical) market. Although many Islamic economists started to incline toward the intermediary idea, most Islamic bankers argue for larger authority. The nature of Islamic financing requires Islamic banks to make
transactions in physical goods and services, but while many of us like to see them done only on initiatives from businesses that need financing, Islamic bankers cling to holding larger authority.4 I think Islamic banks have to be restricted to an financial intermediary role only, otherwise the conditions of competitiveness in the market should be reconsidered and a signorage charge has to assessed for the right to accept deposits and issue credit.
We also find professional writings in Islamic economics that load Islamic banks with a social philanthropic role that uniquely singles them out from among all the economic units. While all economic units are expected to participate in philanthropy, and they actually do whether for altruistic or public relations reasons, charging the Islamic banks with a unique social role that is not required from their conventional counterpart nor from other businesses puts them in an uncompetitive position. In fact, the actual practice of Islamic banks indicates that the majority of them do not interfere even in the payment of the obligatory Zakah for their shareholders let alone the depositors, and the amount of charitable and other donations they give is very trivial compared with their revenues, net profit or assets.
There are also writings that want to deprive the Islamic banks from the right to issue credit through the process of demand deposits creation caused by the partial reserve system. They argue that the demand deposits in Islamic banks should take the legal form of ‘Wadi’ah’ as known in the Fiqh with a slight change that is implied in physically putting all deposits in one vault and using checks and transfers to manipulate them. Some writings reinforce their view by the argument that since the Shari’ah calls for monopolizing the issuance of currency (minting gold and silver coins) in the hand of the government, money creation in all forms including the creation of credit as demand deposits should be strictly held in the hands of the government through a 100% reserve system.
Once more, to the dismay of these writings, the short history of Islamic banks and the development of Fiqh positions on demand deposits took a completely different direction: Demand deposits are treated as loans in order to justify the 100% guarantee for the principal of deposits’ and loans do not require preserving a physical presence of lent assets. On the other hand, central banks apply the same rules of partial reserves to Islamic conventional banks alike. Additionally, the theoretical argument for full reserves is itself borrowed from conventional economics; it is controversial, socially costly and anti the trend of Fitra (that has been the actual real-life basis on which the creation of credit relied) that is growing now toward creating electronic credit in the form of means of payment.
Then comes the latest frustration in the form of the recently prevalent Tawarruq. Regardless of whether it is permissible or not and regardless of what conditions the Shari’ah compatibility may impose on it, Tawarruq brings the whole Islamic banking theory to square 1. The Essential virtue of Islamic banking that is so much elevated by the most liberal Islamic economists is that Islamic Financing has to be stick to the real market transactions and it does not allow for the provision of cash. Now, this new Tawarruq, domestic and international, provides cash at a higher cost than interest.
The last two points that I want to raise about Islamic banking are related to justice between share holders on one hand and the depositors on the other hand; and the effect of globalization. While the present system of Islamic banks runs Shari’ah compatible contracts, it leaves out in the air the effect of the negotiation power on the final products of such contracts. In fact, banks in general and Islamic banks in particular have, much more negotiation power than their contractors under normal circumstances This is one of the theoretical reasons for regulating the banking industry. Islamic banks are left alone to determine the share of profit distribution between depositors and share holders and reap, alone too, the profit that is generated from the investment of demand deposits. Additionally, although owners of Mudarabah deposits share the risk with the bank they are left up in the cold when it comes to the management of the bank. These elements together have created a clear disparity between the rate of profit of distributed to share holders and that given to depositors.
To face any potential side effects of Globalization, Islamic banks were expected to integrate and consolidate. The reality over the last three years indicates that although the total number and aggregate size of Islamic banks increased, there average size remained virtually stagnant. There are indications of deepening their markets and improving the services they provide especially in countries that have more than one Islamic bank. But it seems that merger and unification are not taking their toll in the Islamic banking industry!
All the above requires a revision of the theory of Islamic banking to reassess its functioning and whether it is really distinct from the conventional theory!
Strategic Focus of Islamic Economists, Was it correct?
Since the rebirth of Islamic economics, writers have been busy talking about Islamic banking and finance, Islamic modes of finance, development models derived from the Western models of the sixties and seventies and lately models for corporate finance that copy the American studies in this area.
For such a long time we tried to convince ourselves that the real road to development is through the Islamization of the banking sector. We were overtaken by making it founded on the double-tier Mudarabah to the extent that we spent a considerable amount of ink and paper, and probably energy too, on the issues of Murabahah and Mudarabah while the real practice of Islamic banks has been drifting toward Tawarruq! It was a beautiful illusion for which we neglected the main concerns of our societies as well as the core of Islamic economics: the socio-political requisites of economic development. We even neglected the basic institutions of the Islamic economic system.
For apparent reasons, we concentrated our effort on developing Islamic banking, and they grew to an extent that may make them a monster that destroys the purity of the economic thinking of our elite activists. Islamic banks banking and finance also consumed the
abilities of the elite Shari’ah specialists as if it was the most important issue of the life of our generation. I still remember the cry, about two decades ago, of one Islamic economist for the need to discuss issues in the Islamic political economics, it went with very little response!
It was only recently that a few Islamic economists started dealing with issues of development, political economics of the role of government and of the economics of poverty reduction inspite of the lip service to these issues we find in a few generalist writings that are spayed over the past five decades of Islamic economic. Additionally, the institutional setting of the Islamic economic system and the role of the non-profit sectors have just started to be recognized as important fundamentals of Islamic economics.
There is a serious need for re-examining the existing writings on Islamic economics and to see whether it is acceptable to permit the past trend to take its hold on the future of Islamic economics. There is a need to shift our focus to studying the economics of poverty in the Ummah and how to recruit the economic rhetoric to become an instrument of change and to develop a new generation of our traditional socio-economic institutions to would help reconstruct the interaction between the human element and the organizational setting in a way that creates an environment of development and growth.
The thinking of Islamic economists must lead the Shari’ah specialists to develop structures and rulings that motivate and regulate such reformed institutions instead of being led by, and restrictively limited to, the boundaries developed by scholars who applied the principles of Shari’ah to their socio-economic atmosphere a thousand years ago! The richness of our Shari’ah lies in its ability to respond to changing circumstances and "modes of production" on the basis of its overwhelmingly powerful and universal principles and guiding rulings.
Islamic economics’ Institutions:
There are two kinds of institutions in any society: institutions that are inculcated within the souls of women and men that make them pursue a futurist pattern of behavior construed to create more and more material welfare for every body in one’s environment, like the spirit of Omar Bin al Khattab who had always kept looking for improvements in every things and on all fronts. These are the within institutions that make a necessary condition for development. They are similar to the internal screening of Chapra but they are developmental in nature while Chapra talked only about a moral control screen.
The other type of institutions makes the sufficient condition. They are manifested in the external organizational setting that enables the human element to implement its developmental ideas and plans. These institutions include the rule of law, the right of private ownership and private growth, role of women, the setting of the third sector, the charity, that covers the organization of non-exchange transfers including the role of Zakah and Awqaf. While the second type of institutions is very important and is normally regulated by law, all of its components have internal reflects.
In the writings on Islamic economics over the last half a century, we’ve neglected both types of institutions as well as the internal reflect of the latter. We did not give adequate attention to building developmental mentality and spirit; we did not emphasize the ethics of thrift, perfection and growth of which our religion is the richest of all religions on earth. We’ve always thought that what matters is –by an act of law- eliminating Riba and that will do the needed miracle, all of it.
Although we’ve studied the minute details of the institution of the prohibition of Riba especially from a legalistic point of view, we did not gave enough time to studying the institution of Private ownership or the economic role of woman in the Muslim society. We shied away from scientifically criticizing the status qua because we did not want to be thought of as generalists or Islamic activists. We neglected a major factor of the vicious circle of backwardness, women left behind of development, and even some of us thought of it as an Islamic pride!
The external institutions of Zakah and Awqaf have recently received some of our grace but unfortunately with very little original thinking and a lot of third Hijri century formulation. We dared not rethinking these institutions under contemporary setting. Instead we assimilated the traditional Fiqh of these two institutions with little attention to changing circumstances, forms of assets, modes of production and the changing functions and functionaries of money.
The Zakah and Awqaf institutions we think of today are exactly the same that were applied when agriculture was irrigated by "the Saniyah" and a nice person is appointed as a Mutawalli regardless of the invention of the concept of corporation!
Institutional restructuring requires fresh innovative thinking that is only restricted by the necessary uncontroversial implication of the Revealed Truth. We need to revitalize the functions of the two pillars of the third sector, Awqaf and Zakah, in a way that makes them fulfill in a contemporary system, their envisioned role as they did in a simple economy in the past; and we need to integrate their functions within the overall framework of the Islamic economic system and philosophy.
Public Finance: Why Did we Miss Creating a Theory
Public finance is the part of Islamic social studies that historically received more attention than any other part of Islamic economics. Detailed discussions of public revenues and public expenditures are available in the classical Fiqh and Fatwa writings. Here again a question arises: Did we fail in establishing a general theory of public finance within an Islamic economic framework? The dust around the idea of whether taxation is permissible or not and under what conditions is not yet settled. Also not settled are the debates of private ownership protection against the government, rights of the poor in the public properties and revenues, the functions of taxes, economic or financial, and the restrictions on the economic role of the government.
The Public Finance area is probably the richest of all sub-branches of Islamic economics, yet most writings in this area are heavily influenced by the Western training of the writers and rarely have direct links to the original sources of the Islamic religion or to the
fundamental classical writings on public finance. We need to develop a general theory of taxation and government in Islamic economics that is based on the sources of knowledge of the Islamic economic system and that looks critically at the classical writings on the subject.
Future of Islamic Economics
Seeing it as a teaching discipline and a job-creating platform in the academia and the research centers, Islamic economics is there to stay and expand. In fact, the amount of accumulated knowledge in Islamic economics warrants a full fledge teaching program that can afford undergraduate as well as post graduate studies and degrees.
However, when we take a closer examination at the existing status of Islamic economics we see a mission unaccomplished. There is a need to set clear demarcation lines between Islamic economics and finance on one hand and Islamic Fiqh, especially the Mu’amalat, on the other hand. There is a need to measure the size of Islamic economics and stop being pretentious and as pointed out earlier in this paper there is also a need for more rigorous research in several critical areas of Islamic economics.
Islamic economics is a new but definitely fast growing field of economics. Its trade mark, the non-presence of interest, is not only unique but also affords it a claim of innovation. It has an integrated institutional structure. All it currently needs is that its promoters should wise up and tighten up their theoretical vigor.
On the applied side, it is certainly incorrect to attribute to Islamic economics any of the claims and ineffectiveness of political leaders and dictators of some Muslim countries. Besides, Islamic economists did not provide any agenda for political economics founded or derived from their branch of human knowledge inspite of the need for such an agenda.
It seems to me that the present generation of Islamic economists is exhausted and already consumed in the activities of Islamic banking and finance that the best it can do is to hand over the torch to a second generation that may carry deeper theoretical analysis and fill the gaps left by our generation.
1 The same way they defend the flunked ‘Islamic investment companies’ as the victim of conspiracy!
2 The earliest written formulation came about in 1956, and the first Islamic banks started operation in 1974.
3 Some of them went on real estates speculative trading (non-banking business) that almost wiped out a great part of their assets.
4 The new Islamic banking act (2003) in Kuwait admits in its explanatory memorandum that Islamic banks are mere financial intermediaries but the law itself allow them to initiate direct non-financial business on their own or on behalf of their clients. The compromise came is preventing real estates trades and in subjecting such transactions to the control and supervision of the central bank that is granted authority to impose limitations and restrictions.
Sunday, August 3, 2008
Riba, Interest and Six Hadiths
Do We Have a Definition or a Conundrum?
NOTE for fellow Muslims: Because this topic involves what is haram (prohibited) and halal (permissible) in Islam, every Muslim MUST do his/her own due diligence and conscientiously reach own position/decision in regard to personal practice. In doing so regarding this matter or any other aspect of life, Muslims should seek guidance from the Qur'an and the Prophetic legacy.
Each hadith is properly referenced, but for internal reference within this essay, in the sequence presented, each hadith is numbered with # H-.
Some of the references in this essay are from secondary sources. As the draft takes it final shape, original sources would be gradually cited and replace the secondary source citations.
"There is nothing prohibited except that which God prohibits ...To declare something permitted prohibited is like declaring something prohibited permitted."
Ibn Qayyim[1]
I. Introduction
The Qur'an categorically prohibits riba. However, since there is no unanimity about the definition or scope of this prohibition, we will use the original term riba throughout this essay. In the Qur'an it is specified:
Those who devour riba will not stand except as stands one whom the Evil One by his touch hath driven to madness. That is because they say: "Trade is like riba but Allah hath permitted trade and forbidden riba. Those who after receiving direction from their Lord desist shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (the offence) are companions of the fire: they will abide therein (for ever) [2/al-Baqarah/275]
O ye who believe! Devour not riba, doubled and multiplied; but fear Allah; that ye may (really) prosper. [3/Ale Imran/130]
If ye do it not, Take notice of war from Allah and His Messenger: But if ye turn back, ye shall have your capital sums: Deal not unjustly, and ye shall not be dealt with unjustly. [2/al-Baqarah/279]
Among other verses that deal with riba are: 2/al-Baqarah/276, 278; 4/an-Nisa:160-161. These verses do not really define what is riba and based on the historical practices during the period of revelation, what is definitely prohibited in the Qur'an is known as riba al-Jahiliyyah.
"The way in which riba was doubled and redoubled in the pre-Islamic period is expressed by the son of Zayd b. Aslam (d.136/754) as follows:
Riba in the pre-Islamic period consisted of the doubling and redoubling [of money or commodities], and in the age [of the cattle]. At maturity, the creditor would say to the debtor, 'Will you pay me, or increase [the debt]? If the debtor had anything, he would pay. Otherwise, the age of the cattle [to be repaid] would be increased ... If the debt was money or a commodity, the debt would be doubled to be paid in one year, and even then, if the debtor could not pay, it would be doubled again; one hundred in one year would become two hundred. If that was not paid, the debt would increase to four hundred. Each year the debt would be doubled." [Saeed, p. 22; the above quote is fully annotated in Saeed's work]
The exploitation and injustice of such riba-based transactions are obvious, and hardly require any further explanation or rationalization. This type of riba is known as riba al-jahiliyyah, and according to some Islamic scholars, such as Imam Ahmad Ibn Hanbal, only such riba is unlawful without doubt from the Islamic viewpoint.
"The Qur'an vehemently condemns riba, but provides little explanation of what that term means, beyond contrasting riba and charity and mentioning exorbitant 'doubling.' Commentators describe a pre-Islamic practice of extending delay to debtors in return for an increase in the principal (riba al-jahiliyya). Since this practice is recorded as existing at the time of the revelation, it is one certain instance of what the Qur'an prohibits. Hence Ibn Hanbal, founder of the Hanbali school, declared that this practice - 'pay or increase' - is the only form of riba the prohibition of which is beyond any doubt." [Vogel and Hayes, pp. 72-73, quoting Ibn Qayyim al-Jawziyya, d. 1350, I'lam al-muwaqqa'in 'ala rabb al-'alamin, ed. Taha 'Abd al-Ra'uf Sa'd, Beirut: Dar al-Jil, 1973, 2:153-4]
However, gradually, based on hadith, the scope of riba was widened and two types were identified: riba al-fadl (primarily related to sales transactions), and riba al-nasiya (sales or debt involving deferment), where the latter corresponded to riba al-Jahiliyyah. Ibn Abbas, one of the major companions of the Prophet and earliest of the Islamic jurists, and few other companions (Usama ibn Zayd, 'Abdullah ibn Mas'ud, Urwa ibn Zubayr, Zayd ibn Arqam) "considered that the only unlawful riba is riba al-jahiliyyah." [Saleh, p. 27]
It is important to note here that based on (a) riba al-jahiliyyah and (b) injustice/exploitation as the hikmat (wisdom), usury would be prohibited, but interest as it exists in modern economy and finance and especially in all its forms can't be necessarily categorized as prohibited. However, for what is not defined by the Qur'an, generally definitions are sought from the Sunnah/hadiths, and apparently the same is claimed in this case of riba.
IBF-Net is an online forum focused on Islamic Banking and Finance and has 3,400+ members with interest in this specialized field as scholars, experts, researchers, practitioners or students. In message #5047 on that forum, Abdulkader Thomas, the founder of American Journal of Islamic Finance and editor of the book Interest in Islamic Economics [2006], participated in a discussion about the definition of riba and how the Qur'an and hadith play a role in defining it. He wrote: "... there is no difference between the Quran and the Hadith, but there are six authenticated hadith that allow us to define this forbidden thing."
Actually, his assertion is based on his (edited) book mentioned above, and the enumerated hadiths are taken from a chapter he wrote "What is riba?". His views and works are to be noted, because according to another Shariah expert and member of Shariah Boards of several Islamic Financial Institutions, Sh. Yusuf Talal DeLorenzo, "Abdulkader Thomas has begun in a modest but effective way to emerge as one of the Islamic Finance's most effective voices." [Delorenzo in Thomas, p. 8] Thus, when a claim that some authenticated hadiths "allow us to define this forbidden thing" comes from such an expert, it is worthwhile to explore, indeed.
It is broadly agreed that the Qur'an does not define riba. "The Qur'an does not explicitly define riba as one type of transaction or another. ... The efforts of the fuqaha or judicial scholars like Sh. Zuhayli and the examples of the hadith allow us to determine a clear idea of what is riba." [Thomas, p. 127] Even second Caliph Umar, one of the closest companions of the Prophet, regretted about inadequate guidance about this matter from the Prophet.
Those who devour riba will not stand except as stands one whom the Evil One by his touch hath driven to madness. That is because they say: "Trade is like riba but Allah hath permitted trade and forbidden riba. Those who after receiving direction from their Lord desist shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (the offence) are companions of the fire: they will abide therein (for ever) [2/al-Baqarah/275]
O ye who believe! Devour not riba, doubled and multiplied; but fear Allah; that ye may (really) prosper. [3/Ale Imran/130]
If ye do it not, Take notice of war from Allah and His Messenger: But if ye turn back, ye shall have your capital sums: Deal not unjustly, and ye shall not be dealt with unjustly. [2/al-Baqarah/279]
Among other verses that deal with riba are: 2/al-Baqarah/276, 278; 4/an-Nisa:160-161. These verses do not really define what is riba and based on the historical practices during the period of revelation, what is definitely prohibited in the Qur'an is known as riba al-Jahiliyyah.
"The way in which riba was doubled and redoubled in the pre-Islamic period is expressed by the son of Zayd b. Aslam (d.136/754) as follows:
Riba in the pre-Islamic period consisted of the doubling and redoubling [of money or commodities], and in the age [of the cattle]. At maturity, the creditor would say to the debtor, 'Will you pay me, or increase [the debt]? If the debtor had anything, he would pay. Otherwise, the age of the cattle [to be repaid] would be increased ... If the debt was money or a commodity, the debt would be doubled to be paid in one year, and even then, if the debtor could not pay, it would be doubled again; one hundred in one year would become two hundred. If that was not paid, the debt would increase to four hundred. Each year the debt would be doubled." [Saeed, p. 22; the above quote is fully annotated in Saeed's work]
The exploitation and injustice of such riba-based transactions are obvious, and hardly require any further explanation or rationalization. This type of riba is known as riba al-jahiliyyah, and according to some Islamic scholars, such as Imam Ahmad Ibn Hanbal, only such riba is unlawful without doubt from the Islamic viewpoint.
"The Qur'an vehemently condemns riba, but provides little explanation of what that term means, beyond contrasting riba and charity and mentioning exorbitant 'doubling.' Commentators describe a pre-Islamic practice of extending delay to debtors in return for an increase in the principal (riba al-jahiliyya). Since this practice is recorded as existing at the time of the revelation, it is one certain instance of what the Qur'an prohibits. Hence Ibn Hanbal, founder of the Hanbali school, declared that this practice - 'pay or increase' - is the only form of riba the prohibition of which is beyond any doubt." [Vogel and Hayes, pp. 72-73, quoting Ibn Qayyim al-Jawziyya, d. 1350, I'lam al-muwaqqa'in 'ala rabb al-'alamin, ed. Taha 'Abd al-Ra'uf Sa'd, Beirut: Dar al-Jil, 1973, 2:153-4]
However, gradually, based on hadith, the scope of riba was widened and two types were identified: riba al-fadl (primarily related to sales transactions), and riba al-nasiya (sales or debt involving deferment), where the latter corresponded to riba al-Jahiliyyah. Ibn Abbas, one of the major companions of the Prophet and earliest of the Islamic jurists, and few other companions (Usama ibn Zayd, 'Abdullah ibn Mas'ud, Urwa ibn Zubayr, Zayd ibn Arqam) "considered that the only unlawful riba is riba al-jahiliyyah." [Saleh, p. 27]
It is important to note here that based on (a) riba al-jahiliyyah and (b) injustice/exploitation as the hikmat (wisdom), usury would be prohibited, but interest as it exists in modern economy and finance and especially in all its forms can't be necessarily categorized as prohibited. However, for what is not defined by the Qur'an, generally definitions are sought from the Sunnah/hadiths, and apparently the same is claimed in this case of riba.
IBF-Net is an online forum focused on Islamic Banking and Finance and has 3,400+ members with interest in this specialized field as scholars, experts, researchers, practitioners or students. In message #5047 on that forum, Abdulkader Thomas, the founder of American Journal of Islamic Finance and editor of the book Interest in Islamic Economics [2006], participated in a discussion about the definition of riba and how the Qur'an and hadith play a role in defining it. He wrote: "... there is no difference between the Quran and the Hadith, but there are six authenticated hadith that allow us to define this forbidden thing."
Actually, his assertion is based on his (edited) book mentioned above, and the enumerated hadiths are taken from a chapter he wrote "What is riba?". His views and works are to be noted, because according to another Shariah expert and member of Shariah Boards of several Islamic Financial Institutions, Sh. Yusuf Talal DeLorenzo, "Abdulkader Thomas has begun in a modest but effective way to emerge as one of the Islamic Finance's most effective voices." [Delorenzo in Thomas, p. 8] Thus, when a claim that some authenticated hadiths "allow us to define this forbidden thing" comes from such an expert, it is worthwhile to explore, indeed.
It is broadly agreed that the Qur'an does not define riba. "The Qur'an does not explicitly define riba as one type of transaction or another. ... The efforts of the fuqaha or judicial scholars like Sh. Zuhayli and the examples of the hadith allow us to determine a clear idea of what is riba." [Thomas, p. 127] Even second Caliph Umar, one of the closest companions of the Prophet, regretted about inadequate guidance about this matter from the Prophet.
# H-1 Umar b. al-Khattab said, "There are three things. If Allah's Messenger had explained them clearly, it would have been dearer to me than the world and what it contains: (These are) kalala, riba, and khilafa. [Sunan Ibn Majah, Book of Inheritance, Vol. 4, #2727; Ibn Majah adds:
"According to al-Zawa'id, the authorities of its isnad are reliable, but it has munqata chain of transmission." p. 113; munqata means an interrupted, broken or discontinuous chain]
At the time of the revelation of the verses about riba, the only type of riba known was riba al-jahiliyyah. If only that type is considered, usury (exploitative, exorbitant rate of interest) or usurious transactions would be prohibited. However, later, the scope of the definition of riba was broadened based on hadith. What Abdulkader Thomas referred to are those hadiths (and there are more hadiths in a number of variations) that are commonly presented by the orthodoxy as textual proof for the definition of riba. Using the broadened definition, the orthodoxy considers modern interest in all its forms as prohibited. In this essay, we examine those six hadiths to better understand the claim that these hadiths define riba. I should clarify that there are definitely a lot more than six hadiths pertaining to riba. The only significance of the number "six" in the title of this essay in terms of hadith or themes of hadiths pertaining to riba is merely the claim of an expert in Islamic finance that these "six hadiths" (or themes of hadiths, identified as "Theme") define what is riba. I should also note that what is presented below is not affected by other hadiths, beyond those six, pertaining to riba.
At the time of the revelation of the verses about riba, the only type of riba known was riba al-jahiliyyah. If only that type is considered, usury (exploitative, exorbitant rate of interest) or usurious transactions would be prohibited. However, later, the scope of the definition of riba was broadened based on hadith. What Abdulkader Thomas referred to are those hadiths (and there are more hadiths in a number of variations) that are commonly presented by the orthodoxy as textual proof for the definition of riba. Using the broadened definition, the orthodoxy considers modern interest in all its forms as prohibited. In this essay, we examine those six hadiths to better understand the claim that these hadiths define riba. I should clarify that there are definitely a lot more than six hadiths pertaining to riba. The only significance of the number "six" in the title of this essay in terms of hadith or themes of hadiths pertaining to riba is merely the claim of an expert in Islamic finance that these "six hadiths" (or themes of hadiths, identified as "Theme") define what is riba. I should also note that what is presented below is not affected by other hadiths, beyond those six, pertaining to riba.
II. Some pertinent points about Hadith
In message [#5078], Thomas shared the six hadiths. However, before we discuss these hadiths, there are a few things about hadith that need to be understood. There are several myths or misperceptions about hadith, such as the following:
1. If a hadith quotes the Prophet, we know that's exactly what the Prophet said
2. Sahih collections contain hadith that are indisputable
3. There is no contradiction in any hadith
4. Hadith provides knowledge or information that is certain or definitive
For the discussion on hadith in this essay, myth-1 and -4 are particularly relevant. What is important to note here is that a hadith being sahih (authentic) does not necessarily mean that it provides definitive (or certainty of) knowledge. Only mutawatir type of hadith - a hadith which is reported by such a large number of people that they cannot be expected to agree upon a lie, all of them together - yields certainty of knowledge about a particular hadith. Even then, only mutawatir bil lafz (mutawatir hadiths that contain exact words in each chain) belongs to this category of hadith that yields certainty of knowledge. Mutawatir bil ma'na (mutawatir hadiths that contain only similar, but not exact words in each chain) does not carry the same weight. The first type, mutawatir bil lafz, is very few in number. Indeed, scholars have identified fewer than a dozen hadiths that belong to this category. Non-mutawatir hadiths are known as ahad (solitary). Since mutawatir hadiths are fewer than a dozen (out of hundreds of thousands of hadiths including the variations of chains), it can be said that virtually all hadiths, including sahih hadiths, are ahad and yield only probabilistic knowledge.
They can still be reasonably reliable for guidance, and Muslims should utilize them for guidance and solutions, if properly authenticated in terms of both chains and contents, as long as we (a) acknowledge the probabilistic nature of the source and do not claim certainty in regard to the issue in question, (b) do not formulate laws, codes or dogmas that are too rigid or harsh, especially pertaining to people's life, honor and property, and (c) do not claim finality in terms of authoritativeness of any laws, codes or dogmas that are arrived at using such probabilistic sources. For a detailed discussion about these myths as well as mutawatir/ahad classifications of hadiths and to better appreciate the contents here, please read an essay of this author "Islamic Law and The Use and Abuse of Hadith."
As a matter of illustration, one other point I should touch here before delving into the discussion about those hadiths in detail. One of the critical weaknesses of that book - Interest in Islamic Economics: Understanding Riba - is that the adequate care in dealing with all the hadiths is not indicated. Let me illustrate by referring to a scholar, Sh. Wahba Al Zuhayli, one of the contributors to the book. As introduced in the book, Sh. Zuhayli is "the Dean of the College of Shariah at Damascus University and a member of numerous Shariah supervisory boards governing Islamic banks. His work Fiqh As Sunnah wa Adalatiha is one of the leading and most widely relied upon manuals of modern Islamic jurisprudence." [p. viii]
In the Chapter The juridical meaning of Riba, Sh. Zuhayli cites a hadith as following: "Hakim relates on the authority of Ibn Mas'ud that the Prophet said, 'Riba is of seventy three kinds, the lightest in seriousness of which is as bad as one's marrying his own mother; for the Muslim who practices riba goes mad.' " [p. 27] Endnote #6 adds: "Related by Ibn Majah in a shortened version, and by Hakim in its complete form, deeming it rigorously authenticated. There are many other hadiths of the same meaning, some of which include the phrase, 'Riba consists of seventy categories,' and in others, 'Riba consists of seventy two categories.' “ [p. 49] Interestingly, Ibn Hajar al-Asqalani, one of the foremost hadith scholars (852 AH), has noted about Hakim (and a work of Ibn Jawzi): “A Great Collection of Fabricated Traditions (i.e., by Ibn Jawzi) is as unreliable in its declaring the grade of "forged" as Mustadrak al-Hakim is unreliable in its declaring the grade of ‘sound’ (sahih).”[2]
Let us ignore here the issue of the discrepancy of numbers, seventy vs. seventy-two. Actually, the variation in numbers is much wider. From the traditional viewpoint, such discrepancies do not have any bearing on the acceptability of such hadith, even though it is quite clear that something is wrong here, because some reports say seventy, some seventy-two, some seventy-three and others even more different. However, one of the blind alleys for Muslims at large is that most of them basically have to take such scholars' words at their face value. Let's verify it here. Sh. Zuhayli cites the hadith referring to Ibn Majah as well as Hakim, and this is what Ibn Majah has to add as commentary to that hadith.
According to al-Zawa'id, its isnad contains in it Najsh b. Abdur Rahman Al Ma'shar. The scholars are unanimous on declaring him daif [i.e., weak]." [Sunan Ibn Majah, Vol. 3, #2274, p. 351.]
So, how is this hadith "rigorously authenticated"?[3] Or, is Sh. Zuhayli claiming this about the longer version of hadith reported by Hakim? If so, then why refer to Ibn Majah, but not mention that it is classified daif by Ibn Majah himself? But the problem with this hadith is even deeper. Many other hadith scholars also have disputed the authenticity of this hadith.[4]
Anyway, the book Interest in Islamic Economics: Understanding Riba deserves special attention because the author elevates the controversy about interest to the level of belief and disbelief. "Riba is part of a broader problem of belief and behavior. Refusing to combat riba is akin to disbelief. Conceding the argument that money has an intrinsic value is potentially a greater act of disbelief." [Thomas, p. 133]
Raising any issue to the level of belief and disbelief is a serious matter. Raising an issue such as whether money has an intrinsic value to the level of "potentially a greater act of disbelief" is not just unwarranted, but also seriously presumptuous and judgmental. As it is generally agreed that the Qur'an doesn't define riba, but (it is claimed) that hadith does, the readers need to be mindful about the hadiths mentioned in such works, because readers either have to assume that the quoted hadith are authentic (unless mentioned otherwise) or they would be informed that the hadiths are "authenticated" (even "rigorously authenticated"). However, conscientious readers should never defer their own due diligence to others.
In the following segments, the pertinent hadiths will be discussed in assessing the assertion that riba is defined by certain "authenticated" hadiths. It is important to keep in mind that even though Islamic scholars utilize and apply hadith rather broadly in formulating Islamic laws, the scholars also generally agree and acknowledge that even authentic (sahih) hadiths yield only probabilistic knowledge. [for details, see Farooq_1]
III. Those six (themes of) hadith
Hadith I: Theme - "No riba in spot transactions" or No riba except in deferment/credit
# H-2I.a. From Usamah ibn Zayd: The Prophet, peace be on him, said: "There is no riba except in nasi'ah [waiting]." [Bukhari, Kitab al-Buyu, Bab Bay al-dinari bi al-dinar nasa'an, #386; also Muslim and Musnad Ahmad]
# H-3I.b. "There is no riba in hand-to-hand [spot] transactions." [Muslim, Kitab al-Musaqat, Bab bay'i al-ta'ami mithlan bi mithlin; also in Nasa'i].
There are several variations of this hadith. None of these hadith is mutawatir. Notably, this hadith in all its variations is quite categorical that there is no riba in hand-to-hand or spot transactions. Thus, any transaction that is otherwise permissible and a spot transaction, it can't involve riba. Even the orthodoxy accepts these hadith as authentic (sahih), though no certainty of knowledge is established by these hadiths, as these are not mutawatir. However, if this hadith is taken literally, as Allamah Suhail points out: "these narrations demolish the self-invented castle of riba al-fadl." [p. 8]
The hadith narrated by Usama - "There is no riba except in nasi'ah or deferment" - suggests that deferment or credit involves riba. However, it is all too well known and supported by many hadiths that the Prophet had entered into credit-purchase transactions (nasi'ah) and also that he has paid more than the original amount. Also, "Sahaba have paid more than the original amount at the time of repayment and the Prophet approved of it." [Suhail, p. 84]
# H-4Sahih al-Bukhari, Volume 3, Book 34, Number 282:Narrated 'Aisha:The Prophet purchased food grains from a Jew on credit and mortgaged his iron armor to him. [ishtara ta'aman min yahudi ila ajalin wa rahnahu dir'an min hadid; in al-Bukhari, Vol. 3, #309 the hadith is narrated with nasi’ah, instead of ajal]
# H-5Sahih al-Bukhari, Volume 3, Book 41, Number 579:Narrated Jabir bin Abdullah:I went to the Prophet while he was in the Mosque. (Mis'ar thinks that Jabir went in the forenoon.) After the Prophet told me to pray two Rakat, he repaid me the debt he owed me and gave me an extra amount.
# H-4 is stated without any qualification: there is no riba except in nasi’ah. Of course, there are other hadiths, also sahih, that add further qualifications. However, if deferment or credit-based transactions (nasi'ah) does involve riba, which is categorically prohibited in the Qur'an, then how did the Prophet engage in such purchase based on deferred payment (# H-4’ ajal)? Of course, this type of mortgaging or using pawnbroker’s service is recognized as Islamically valid and acceptable, as illustrated through this hadith. Also how did he pay extra (another meaning of riba, which means “excess”) as in # H-5 above? Are we to assume that the Jew who offered food to the Prophet on credit did not benefit from the transaction, and if he did, then isn't that riba? It should be noted that while such deferred/credit purchase as in # H-4 is considered permissible, buying food on credit (either on a secured or unsecured) basis indicates much greater vulnerability of the buyer/mortgagee than what is involved in a profit-oriented, commercial transaction. Also since this was a valid and common practice, why these hadiths are trying to emphasize the point that they were paid extra in repayment of debt?
Also, there are those who argue that voluntary extra payment in case of a loan without any “stipulation” of excess is permissible, based on hadiths, such as # H-5. However, if that is so, then it is also contradicted by other hadiths: ”Every loan that attracts a benefit/advantage is riba.”[5] Without getting into the issue of authenticity of any such narration, advocates of Islamic finance and banking commonly use such hadith.[6] If that is so, then there is no room for differentiating between loans with “stipulated” excess or voluntarily paid extra. How can “all” loans with accruing a benefit to the lender is riba, but gratuitous loans are not? This is like having the cake and eat it too. Citing the hadith “All loans with a benefit to the lender is riba” to justify that any loans with an extra is prohibited, but then limiting it only to the loans with “stipulated” excess prohibited, to reconcile the hadith that allow voluntary extra payments. Well, this is just another fundamental problem that there are so many hadiths that are contradictory and many jurists or commentators have a tendency to be selective in using hadiths as textual evidence.
Of course, it could also be argued that both the abovementioned hadiths are from a period before riba was prohibited. However, then, we will be indulging in making an inference, because there is no definitive knowledge or information to support such an argument.
Hadith II-III: Theme - In case of loans, no excess is to be accepted by the lender
# H-6II. From Anas ibn Malik: The Prophet, peace be on him, said: "If a man extends a loan to someone he should not accept a gift." (Mishkat, op. cit., on the authority of Bukhari's Tarikh and Ibn Taymiyyah's al-Muntaqa).
# H-7III. From Abu Burdah ibn Abi Musa: I came to Madinah and met 'Abdallah ibn Salam who said, "You live in a country where riba is rampant; hence if anyone owes you something and presents you with a load of hay, or a load of barley, or a rope of straw, do not accept it for it is riba." [Sahih al-Bukhari, Volume 5, Book 58, Number 159].
# H-8Narrated AbuUmamah: The Prophet said: “If anyone intercedes for his brother and he presents a gift to him for it and he accepts it, he approaches a great door of the doors of riba.” [Sunan Abu Dawood, Book 23, # 3534]
Both the reports above actually relate to the same theme. A lender should not accept any excess (even in the form of gift) as part of or with the repayment of the principal. # H-6 Hadith above is not from any primary hadith collection. Mishkat is a secondary source. Also, the two other sources, Bukhari's Tarikh (history) and Ibn Taymiyyah's al-Muntaqa are not hadith sources either. Hadith # H-7 is from Sahih al-Bukhari, but is actually an athar, and also neither of the preceding two reports is mutawatir.
The implication of these two reports is quite clear. They emphasize the role of the lender. Nothing in excess of the principal should be accepted by the lender. It does not say anything about the borrower not to pay anything extra. Yet, these reports that disallow the lenders from accepting an extra conflict with the Prophetic practice that he himself has offered extra and the lender accepted it [see the hadith from Bukhari # H-5 above]. Why would the Prophet forbid the lender to accept any extra, while he himself has paid extra? If this constitutes riba and it is prohibited, whether in the Qur'an and/or hadith, then how does one reconcile the fact that in another hadith, both the receiver and payer of the riba are identified as equally guilty?
# H-9Sahih Muslim, Book 010, Number 3854:Abu Sa'id al-Khudri (r) reported Allah's Messenger (p) as saying: Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, salt by salt, like by like, payment being made hand to hand. He who made an addition to it, or asked for an addition, in fact dealt in riba. The receiver and the giver are equally guilty.
Also, the two hadiths in theme II-III, are contradicted by other hadiths that show that the Prophet has approved of extra payments in settlement of debts. There are also cases where in settlement of in-kind borrowing involved better quality than the original.
# H-10Narrated Abu Hurayrah that the Prophet borrowed a two-year-old camel and returned a similar camel, and in addition he gave another camel, and said: 'Best of you are the best in returning your debts.' [Suhail, p. 106, quoting Jami Al-Tirmidhi, Kitab al-Buyu, v.6, #56]
# H-11Sahih Muslim, Book 010, Number 3899:Abu Huraira (r) reported: Allah's Messenger (p) took a camel on loan, and then returned him (the lender) the camel of a more mature age and said: Good among you are those who are good in clearing off the debt.
# H-12Muwatta, Book 31, Number 31.42.91:Malik related to me from Humayd ibn Qays al-Makki that Mujahid said, "Abdullah ibn Umar borrowed some dirhams from a man, then he discharged his debt with dirhams better than them. The man said, 'Abu Abdar-Rahman. These are better than the dirhams which I lent you.' Abdullah ibn Umar said, 'I know that. But I am happy with myself about that.' "
# H-13Sunan Abu Dawood, Book 22, Number 3341:Narrated Jabir ibn Abdullah:The Prophet (p) owed me a debt and gave me something extra when he paid it.
An argument can be made that those hadiths, disallowing the lender to accept anything extra, were from a period before the prohibition of riba took place. In that case, those hadiths can't be used for prohibition of riba. Furthermore, if this argument that those hadiths were from the pre-prohibition period is valid, then once again, we have to contend with the problem that there is no definitive information or corroboration to that effect. Is there?
Another plausible and sensible explanation is that those hadiths disallowing the lenders any excesses pertain to Qard al-Hasanah [2/al-Baqarah/245], a non-profit or gratuitous loan of benevolence. If so, then those hadiths simply reinforce the verse about Qard al-Hasanah. However, by the same token, any profitable transaction, whether interest-based or not, wouldn't be covered by those hadiths.[7]
Some argue that such voluntary extra payment is alright, but not if such extra is stipulated by the lender. However, the reason such argument is invalid is because riba al-jahiliyyah, the type indicated in the Qur'an, was not based on stipulated excess.
Indeed, riba related hadiths do not use the term loan' (qard) or 'debt' (dayn). Abdullah Saeed discusses the following based on Muhammad Rashid Rida [d. 1935], an eminent scholar and the disciple of Shaikh Muhammad Abduh.
"... [N]one of the authentic hadith attributed to the Prophet in relation to riba appears to mention the terms, 'loan' (qard) or 'debt' (dayn). This absence of any reference to loans or debts in riba-related hadith led a minority of jurists to contend that what is actually prohibited as riba is certain form of sales, which are referred to in the hadith literature." [quoting Rida, al-Riba wa al-Mu'amalat fir al-Islam, Cairo: Maktabat al-Qahira, 1959, p. 11]
Hadith IV-V: Theme - Barter/Trade except spot transactions or alikes (in quality or quantity) of certain commodities is prohibited
# H-14IV.a. From Abu Said al-Khudri: The Prophet (p), said: "Do not sell gold for gold except when it is like for like, and do not increase one over the other; do not sell silver for silver except when it is like for like, and do not increase one over the other; and do not sell what is away [from among these] for what is ready." [Bukhari, Kitab al-Buyu, Bab bay i al-fiddati bi al-fiddah, #385; also Muslim #3845, Tirmidhi, Nasai'i and Musnad Ahmad].
# H-15IV.b. From 'Ubada ibn al-Samit: The Prophet (p), said: "Gold for gold, silver for silver, wheat for wheat, barley for barley dates for dates, and salt for salt - like for like, equal for equal, and hand-to-hand; if the commodities differ, then you may sell as you wish, provided that the exchange is hand-to-hand." [Muslim, Kitab al-Musaqat, Bab al-sarfi wa bay'i al-dhahabi bi al-waraqi naqdan, #3853; also in Tirmidhi].
These hadiths, mentioned by Abdulkader Thomas, do not require separate explanation, because as already demonstrated above, hand-to-hand or spot transactions (bartering or trade) are permissible in Islam and such transactions do not involve riba. But let us not be so hasty in drawing any conclusion. Readers should patiently go through an illustrious demonstration presented below.
There are many examples of hadiths, including those pertaining to riba, that might be an amazing maze.
# H-16Sahih al-Bukhari, Volume 3, Book 34, Number 344:Narrated 'Umar bin Al-Khattab: Allah's Apostle said, "The bartering of gold for silver is Riba (usury), except if it is from hand to hand and equal in amount, and wheat grain for wheat grain is usury except if it is form hand to hand and equal in amount, and dates for dates is usury except if it is from hand to hand and equal in amount, and barley for barley is usury except if it is from hand to hand and equal in amount."
According to the above hadith, exchanges involving gold for silver is riba except hand to hand (or spot) transaction and equal in amount. Now let's read the following hadith from al-Bukhari:
# H-17Sahih al-Bukhari, Volume 3, Book 34, Number 388:Narrated Abdur-Rahman bin Abu Bakra:that his father said, "The Prophet forbade the selling of gold for gold and silver for silver except if they are equivalent in weight, and allowed us to sell gold for silver and vice versa as we wished."
According to the above hadith, exchanges involving gold for silver is riba except if they are equal in amount. There is no mention of spot/hand-to-hand restriction. Now let's read the following hadith from al-Bukhari:
# H-18Yahya related to me from Malik from Ibn Shihab from Malik ibn Aus ibn al-Hadathan an-Nasri that one time he asked to exchange 100 dinars. He said, "Talha ibn Ubaydullah called me over and we made a mutual agreement that he would make an exchange for me. He took the gold and turned it about in his hand, and then said, 'I can't do it until my treasurer brings the money to me from al-Ghaba.' Umar ibn al-Khattab was listening and Umar said, 'By Allah! Do not leave him until you have taken it from him!' Then he said, 'The Messenger of Allah, ..., said, "Gold for silver is usury except hand to hand. Wheat for wheat is usury except hand to hand. Dates for dates is usury except hand to hand. Barley for barley is usury except hand to hand." "' [also, Muatta Imam Malik, Kitab al-Buyu, #1321]
According to the above hadith, exchanges involving gold for silver is riba except hand to hand (or spot) transaction. There is no mention here of equivalence in weight as a restriction. Now let's read the following hadith from al-Bukhari:
# H-19Sahih al-Bukhari, Volume 3, Book 34, Number 383:Narrated Abu Bakra: Allah's Apostle said, "Don't sell gold for gold unless equal in weight, nor silver for silver unless equal in weight, but you could sell gold for silver or silver for gold as you like."
According to the above hadith, when exchanges involve gold for silver or silver for gold, there is no restriction whatsoever. But wait. Let's read the following hadith from Sahih Muslim.
# H-15 (citing once more)Sahih Muslim, Book 010, Number 3853:Ubida b. al-Simit (Allah be pleased with him) reported Allah's Messenger (pbuh) as saying: Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt, like for like and equal for equal, payment being made hand to hand. If these classes differ, then sell as you wish if payment is made hand to hand.
According to above hadith, even when the classes differ - gold for silver or silver for gold, we can't do as we wish. It still has to be spot/hand-to-hand transaction. So, which one is it? Interestingly, one of the contemporary scholars of Islamic fiqh, Imran Ahsan Khan Nyazee, who argues that he has a better way to explicate the prohibition of riba (including bank interest) based on the works of the earlier classical jurists, ambitiously asserts:
"... the traditions pertaining to riba are some of the most complex traditions in the in the entire Islamic legal literature. Studying them is instructive not only for discovering the meaning of riba, but also for understanding the methods of interpretations employed by the jurists. These traditions help us in comprehending the general principles of Islamic law. They bring out the unique nature of this legal system and make out a strong case for the serious study of the work of the jurists." [online pp. 25-26]
Hopefully, the pertinent hadiths (# H-15-# H-19) help the readers to recognize and appreciate the challenge the jurists have been and still are up against in establishing a clear and incontrovertible definition of riba in light of hadith. Did Nyazee succeed in doing a better job than his predecessors, as he boldly claimed? Well, readers should read his works and decide for themselves.
Notably, some of these hadiths, all pertaining to the same issue, specifically mention riba and some do not. But do these hadiths pertain to riba at all? Well, to deal with that question, we need to move to the next theme, which comes with similar hadiths, but specifically mention of the riba connection.
# H-20V.a. From Abu Sa'id al-khudri: The Prophet (p) said: "Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt - like for like, and hand-to-hand. Whoever pays more or takes more has indulged in riba. The taker and the giver are alike [in guilt]." [Sahih Muslim, #3854; and Musnad Ahmad].
Beyond the # H-16, 18, where the word riba is specifically mentioned, in the preceding hadith, an additional statement with specific reference to riba is present: "Whoever pays more or takes more has indulged in riba." This is important because in such hadith a specific reference to riba is made, on the basis of which riba al-fadl (riba involving excesses in barter/trade) has been identified and declared prohibited by many Islamic scholars and jurisprudents.
First, this is not a mutawatir hadith either, and thus does not yield certainty of knowledge. However, there are more problems with this preceding hadith with the additional statement: "Whoever pays more or takes more has indulged in riba. The taker and the giver are alike [in guilt]." The way this hadith is narrated would give the impression that the additional (underlined) part is also from the Prophet. However, as Allamah Suhail convincingly has proven in his book What is Riba? that this additional part is not from the Prophet. [See pp. 63-68]
There are hadiths in Sahih Muslim that dispute this same hadith (reported by Ubadah bin Samit).
# H-21Sahih Muslim, Book 010, Number 3852:Abil Qiliba reported: I was in Syria (having) a circle (of friends). in which was Muslim b. Yasir. There came Abu'l-Ash'ath. He (the narrator) said that they (the friends) called him: Abu'l-Ash'ath, Abu'l-Ash'ath, and he sat down. I said to him: Narrate to our brother the hadith of Ubada b. Samit. He said: Yes. We went out on an expedition, Mu'awiya being the leader of the people, and we gained a lot of spoils of war. And there was one silver utensil in what we took as spoils. Mu'awiya ordered a person to sell it for payment to the people (soldiers). The people made haste in getting that. The news of (this state of affairs) reached 'Ubada b. Samit, and he stood up and said: I heard Allah's Messenger (may peace be upon him) forbidding the sale of gold by gold, and silver by silver, and wheat by wheat, and barley by barley, and dates by dates, and salt by salt, except like for like and equal for equal. So he who made an addition or who accepted an addition (committed the sin of taking) interest. So the people returned what they had got. This reached Mu'awiya. and he stood up to deliver an address. He said: What is the matter with people that they narrate from the Messenger (may peace be upon him) such tradition which we did not hear though we saw him (the Holy Prophet) and lived in his company? Thereupon, Ubaida b. Samit stood up and repeated that narration, and then said: We will definitely narrate what we heard from Allah's Messenger (may peace be upon him) though it may be unpleasant to Mu'awiya (or he said: Even if it is against his will). I do not mind if I do not remain in his troop in the dark night. Hammad said this or something like this.
Indeed, there are other narrations of the same theme and narrated on the authority of the same companion Ubadah bin Samit, without any such additions.
# H-22Ubadah said: the Prophet of Allah (p) prohibited that we sell gold for gold, silver for silver, wheat for wheat, barley for barley, and dates for dates. [Suhail, p. 66, quoting Sunan an-Nasai, Kitab al-Buyu, 275]
The following narration makes it further clear that the additional part is not from the Prophet.
# H-23"Muslim ibn Yasar and Abdullah ibn Ubayd, who was called 'Ibn Hurmuz,' narrated to me that Ubadah ibn al-Samit and Mu'awiyah met once. Ubadah narrated to them: 'The Prophet, pbuh, forbade us to sell gold for gold, silver for silver, dates for dates, wheat for wheat, barley for barley -- one of them [the two narrators] said: 'and salt for salt' while the other did not say it -- except quantity for quantity and kind for kind. One of them said: whoever increased or sought an increase committed riba - the other [narrator] did not say it." [Suhail, p. 66, quoting an-Nasa'i, Kitab al-Buyu, 275]
Thus, not only that this is not a mutawatir hadith, but also that the hadith narration has significant discrepancy and there seems to be a statement from a companion of the Prophet that has been mixed up as a statement from the Prophet.
There is one other problem, and it's a rational one. In these hadiths, the Prophet seems to prohibit barter transactions, specifying five/six commodities, unless such transactions are on the spot and alike in quality and/or quantity. However, who in the world did or does exchange an ounce of gold of exact quantity and of same quality? What would be the rationale for exchanging a pound or kilo of barley with another pound or kilo of the same quality? If the orthodox position or understanding is considered valid, here it seems that the Prophet has permitted a kind of transaction that people have no reason to engage in. Usually, a permission involves something that people usually do or need. In this case, none of those possibilities apply. An equal amount of the same quality of gold will be exchanged only by people without any sense. How in the world the Prophet would permit something that people cannot be expected to sensibly engage in? This is clearly a trivialization of the Prophet's guidance, especially if the Qur'anic injunction about riba is dilinked from the rationale/wisdom (hikmah) - that is, zulm or injustice/exploitation - specifically mentioned in the Qur'an.
That takes us to hadiths pertaining to some allegedly prohibited transactions that took place in the context of Khaybar.
# H-24V.b. From Abu Sa'id and Abu Hurayrah: A man employed by the Prophet, peace be on him, in Khaybar brought for him janib [dates of very fine quality]. Upon the Prophet's asking him whether all the dates of Khaybar were such, the man replied that this was not the case and added that "they exchanged a sa [a measure] of this kind for two or three [of the other kind]". The Prophet, peace be on him, replied, "Do not do so. Sell [the lower quality dates] for dirhams and then use the dirhams to buy janib. [When dates are exchanged against dates] they should be equal in weight." [Sahih al-Bukhari, Kitab al-Buyu, Bab idha arada bay'a tamrin bi tamrin khayrun minhu, Volume 3, Book 38, Number 499; also Muslim; Muwatta, #31.12.20 and Nasa'i).
# H-25V.c. From Abu Sa'id: Bilal brought to the Prophet, peace be on him, some barni [good quality] dates whereupon the Prophet asked him where these were from. Bilal replied, "I had some inferior dates which I exchanged for these - two sas for a sa." The Prophet said, "Oh no, this is exactly riba. Do not do so, but when you wish to buy, sell the inferior dates against something [cash] and then buy the better dates with the price you receive." [Muslim, Kitab al-Musaqat, Bab al-ta'ami mithlan bi mithlin, #3871; also Musnad Ahmad].
First, notice the discrepancy between two hadiths about the same incident. In the first one there is no reference to riba at all, while the second one specifically makes a connection to riba. Also, the wording is quite different. In the first one, it says: "Do not do so. Sell [the lower quality dates] for dirhams and then use the dirhams to buy janib. [When dates are exchanged against dates] they should be equal in weight." In the second one, it says: "when you wish to buy, sell the inferior dates against something [cash] and then buy the better dates with the price you receive."
Obviously, even though the narrators are apparently quoting the Prophet, they are actually narrating an incident in their own words. There are other reports of the same incident that don't make any connection with riba at all. Indeed, these hadiths are not about any prohibition. No definitive conclusion, especially from legal viewpoint, can be derived from these hadiths in question. Dr. Mohammed Fadel (Faculty of Law, University of Toronto) has aptly identified it as "prudential regulation."[8]
In a barter between low-quality dates and better-quality dates, there is a risk that the person seeking this barter may be at a disadvantage and not fetch the true or fair market value of the low-quality dates. Indeed, it is not uncommon that even in purchases of car, the buyers are recommended that if they have some tradeable used vehicle, it is better to have it sold separately than trade it in. As a major financial site explains: "Selling your old car takes more time and know-how, but you can potentially get more money than when trading it in."[9]
First thing to note is that there is no guarantee that either trading or selling would necessarily fetch a higher value; it's only "potential." That's why the seller/trader should be knowledgeable and have done the homework to assess the proper market value. It's only prudent.
However, now let's take the case of this issue of car - trade or sell and impose a restriction/prohibition that no trade would be permissible. The only option to the owner of the vehicle is that he must sell the old vehicle separately. In such case, one needs to consider the reality of costs related to advertising, time to show the vehicle, depreciation during the time the vehicle is further held, etc. Of course, there is a more compelling factor that there has to be a potential buyer at the price the seller reasonably wants. Barring all these, with a prohibition or restriction about trading, the seller may be stuck. What if the seller needs the next/newer vehicle urgently?
Let's now try to understand the exchange of dates. We all know that one of the fundamental problems with barter is that there has to be Double Coincidence of Wants.[10] If I have low-quality dates and I MUST sell it first, I must find a buyer (who is not necessarily interested in selling anything). What if I don't find a buyer (and, especially at a reasonable or fair price) before my fresh low-quality date is not fresh any more? If trading/barter in this context is prohibited, it indeed can become an unwarranted and unjustified difficulty/hardship (haraj, as argued by Dr. Fadel).[11] However, as a "prudential" guidance of wisdom, the Prophetic statement makes perfect sense.
Indeed, not every single such matter should not be approached from a legalistic angle, verged on literalism, without taking into consideration the maqasid, the intent of the prohibition, or in this case, prudential guidance. Indeed, such literalist and legalistic interpretation often trivializes, as in this case, the otherwise perfectly wise and valuable guidance from the Prophet.
# H-26Some juicy dates were presented to the Holy Prophet. The Holy Prophet's dates from [his own orchard] at Al-'Ula were of the dry kind. He asked: 'where from have you got these dates?' People replied: 'we have bought one sa' of this with two sa's of our dates.' He said: 'don't do it. It's not right. But sell your dates and buy of this according to your need.' [Suhail, p. 55, quoting Sunan an-Nasa'i bi shar'hi as-Suyuti, Kitab al-buyu, Vol. 7, #272]
# H-27I had in the Prophet's [store] one mudd [of dates]. I found better [dates] being sold at one sa' for two sa's, so I bought it [the better quality] and bought it to the Prophet. He asked, 'from where have you got it, Bilal? I said I bought one sa' for two sa's. He said: 'return it and bring back to us our dates.' [Suhail, p. 55, quoting Sunan al-Darimi, Vol. 2, #257]
So, what these hadiths are really about and why other hadiths of the same incident end without any reference to riba? As Allama Suhail explains: "[The above] hadith ends there. The reason for that order is obvious: the Holy Prophet lived a very simple and frugal life, even the flour for his bread was not sieved. Then how could he tolerate that just for the sake of gratification of the palate, two sa's of dates be exchanged with one sa' of better quality dates. Shah Waliullah Muhaddith Dihlawi, too, has mentioned the same reason for non-permissibility of [this type of transaction, namely] muratalah." [p. 55]
Since neither of the preceding two hadiths provide any rationale directly from the Prophet, the explanation given by Allamah Suhail and Shah Waliullah Dihlawi is speculative. However, such explanation can possibly apply only to # H-27, where the Prophet asked to bring back the dates. That explanation in not adequate for those hadiths that ask to sell the dates and then buy according to one's need. For those hadith, the sell or trade-in a vehicle (discussed above) should be helpful to understand the problem in this context.
Regardless, there is another major problem with this riba-related hadiths that are available to us in the context of Khaybar. Any reference to riba involving prohibited transactions in the context of Khaybar must have been a later accretion or insertion, because according to authentic hadiths, the last revelation in the Qur'an pertained to riba.
# H-28Sahih al-Bukhari, Volume 6, Book 60, Number 67:Narrated Ibn Abbas:The last Verse (in the Quran) revealed to the Prophet was the Verse dealing with usury (i.e. Riba).
# H-29Sahih al-Bukhari, Volume 6, Book 60, Number 64:Narrated 'Aisha:When the Verses of Surat-al-Baqara regarding usury (i.e. Riba) were revealed, Allah's Apostle recited them before the people and then he prohibited the trade of alcoholic liquors.# H-30Sahih al-Bukhari, Volume 6, Book 60, Number 66:Narrated 'Aisha:When the last Verses of Surat-al-Baqara were revealed, the Prophet read them in the Mosque and prohibited the trade of alcoholic liquors. "If the debtor is in difficulty, grant him time till it is easy for him to repay.." (2.280)
Which verses were the last to be revealed is not without contradiction. According to another hadith, also from Sahih al-Bukhari [Volume 6, Book 60, Number 129], the last verse revealed was about a different matter. But we will ignore that discrepancy in this context, and focus on the discussion about riba and Khaybar.
The battle and conquest of Khaybar occurred in 627 AH. If the last verse or verses revealed were about riba, as mentioned in # H-28, then that must have been a few years after the battle/conquest of Khaybar. Thus, there couldn't have been any riba-related prohibitive injunction that could be connected with all those incidents in Khaybar.
# H-29 and # H-30, also from Sahih al-Bukhari, indicate an altogether different anomaly. According to # H-29, when the verses related to riba were revealed, the Prophet recited those and then he prohibited the trade of alcoholic liquors. Something else is wrong here. What do the verses about riba have anything to do with the prohibition of trading alcoholic liquors? The prohibition of alcoholic liquors occurs in Surah al-Ma'ida [5:90], which was revealed much earlier than the period of the last revelations. Was the verse prohibiting alcoholic liquors revealed several years earlier, but the trading was prohibited much later?
Also, in # H-30, it is repeated that the last verses revealed were about riba and refers to and quotes [2:280], but once again, there is no connection with prohibiting the trade of alcoholic liquors in that context.
It is well known that at the time of the final prohibition of intoxicants, there was widespread spilling of wines as public gesture of compliance with the prohibition. In the Tafhimul Qur'an, Sayyid Abul A'la Maududi commentary on 5:90, the verse of final prohibition, explains:
[When] 5:90 was sent down he [the Prophet] declared, 'Now those who possess wine, can neither drink it nor sell it. They should, therefore, throw it away.' Accordingly, it was spilt in the streets of al-Madinah to run wastefully. Some people, however, asked the Holy Prophet, 'May we give it as a present to the Jews?' He replied, 'The One who has made it unlawful has also forbidden to give it as a present.' [The Meaning of the Qur'an, Delhi: Board of Islamic Publications, Vol. 2, undated, p. 75]
I have not been able to independently verify or identify the source from which Maududi has taken this information. However, the same information is reported as hadith, in the commentary on the same topic in Sahih Muslim but without giving the source for it. [Abdul Hamid Siddiqi, transl. Sahih Muslim, Lahore, Pakistan: Sh. Muhammad Ashraf, Vol. III, 1982, p. 1097, note #2400] Therefore, the occasion of the prohibition of wine was the same as the prohibition of trading in alcoholic liquors. This is further corroborated by a hadith in Muatta Imam Malik.
# H-31Yahya related to me from Malik from Zayd ibn Aslam that Ibn Wala al-Misri asked Abdullah ibn Abbas about what is squeezed from the grapes. Ibn Abbas replied, "A man gave the Messenger of Allah (pbuh) a small water-skin of wine. The Messenger of Allah (pbuh) said to him, 'Don't you know that Allah has made it haram?' He said, 'No.' Then a man at his side whispered to him. The Messenger of Allah (pbuh) asked what he had whispered, and the man replied, 'I told him to sell it.' The Messenger of Allah (pbuh) said, 'The One who made drinking it haram has made selling it haram.' The man then opened the water-skins and poured out what was in them ." [Book 42, Number 42.5.12]
There is no such separate prohibition of trading in alcoholic liquors, as indicated by the Prophet's statement in the hadith above. Had there been such a separate prohibition (and public pronouncement of it), these people at the presence of the Prophet would have known. Thus, hadiths of Khaybar for prohibition of riba creates multiple problems. Readers now can assess for themselves, whether those hadiths give us reliable information to resolve the issue of defining riba, as some people so easily claim.
Hadith VI: Theme - Transactions involving products (or commodity money) of composite but separable components
# H-32VI. From Fadalh ibn 'Ubayd al-Ansari: On the day of Khaybar he bought a necklace of gold and pearls for twelve dinars. On separating the two, he found that the gold itself was to more than twelve dinars. So he mentioned this to the Prophet, peace be on him, who replied, "It [jewellery] must not be sold until the contents have been valued separately." [Muslim, Kitab al-Musaqat, Bab bay'i al-qiladah fiha kharazun wa dhahab, #3864; also in Tirmidhi and Nasa'i].
We have already explained above how problematic is using those riba-related hadiths in the context of Khaybar. In regard to the above hadith, as Allamah Suhail has capably demonstrated, none of the hadith pertaining to this particular incident or transaction relates in any way to riba. The rationale for this hadith and the instruction it contains is quite simple. Often in barter transactions, the initiating party of interest might be at a disadvantage and may not realize the full market value of the product he or she trying to exchange. Selling the item in possession for cash and then using the cash to purchase the item of interest would generally yield proper market value. This has nothing to do with riba. Allamah Suhail explains:
"Khaybar was a centre of Jews who happened to be very rich. So when Khaybar was conquered Muslims got a lot of booty which included silver and gold ware. Muslim mujahids were used to a simple way of life, they did not know how to use those silver and gold wares, so they wanted to sell those wares for a trifle and get cash. Many people in fact sold at a price much lower than the actual value, that is, silver wares and ornaments weighing one uqiyah were sold by them to Jews for two or three pennies, whereas the weight of one uqiyah is several times more than two or three dinars.
When the Holy Prophet came to know that the mujahids were carelessly selling the booty, and that too to the conquered and deceitful Jews, he ordered that the God-given wealth should not be squandered like that, that at least they should not sell for a price less than that of its weight." [pp. 57-58]
In such context, separating necklace (with gemstones) and gold is expected to fetch better value for the Muslim sellers. By the way, these hadiths are not mutawatir either and thus do not yield certainty of knowledge.
IV. Definition or Conundrum? The issue of illah
Fifteen centuries after the Prophet, Muslims are still arguing whether the Tarawih prayer of Ramadan is twenty units or eight units, or whether amin should be said aloud in congregational prayers. Somehow to stake a bold claim that while the Qur'an does not define what is the prohibited riba, hadiths do define riba, especially to be applied in our contemporary context, belies our historical legacy of our scholarship. Does bringing the pertinent hadiths into picture help with defining what does the prohibition cover in our current time or actually adds to a rather formidable conundrum?
To appreciate the nature and the extent of the problem, it is important to refer to qiyas (analogical reasoning/deduction), the fourth source of Islamic jurisprudence. Especially in cases of pertaining to worldly matters, qiyas generally does not yield any certainty of knowledge, as its result is speculative (zanni).
"The rule of law established by qiyas is probable (zanni), for generally the causes of the rules of law determined on the basis of qiyas and processed by ijtihad have been found probable (maznunah) after a general survey of such reasonings. Hence qiyas does not entail certainty (qat')." [Hasan, 1986, pp. 24-25, referring to Bahr al-Ulum, Fawatih al-Rahamut, Baghdad, 1970, II, 249]
For a broad, introductory overview of qiyas, with detailed analysis of some pertinent issues, please read another of my essay "Qiyas (Analogical Reasoning) and Some Problematic Issues in Islamic law." Here, let's deal with illah, a core aspect of qiyas.
Technically, Qiyas is the extension of Shariah value from an original case, or asl, to a new case, because the latter has the same effective cause as the former. ... The main sphere for the operation of human judgment in qiyas is the identification of a common illah between the original and the new case. Once the illah is identified, the rules of analogy then necessitate that the ruling of the given text be followed without any interference or change. [Kamali, pp. 264-265]
It is important to keep in mind that qiyas is essentially speculative.
"The jurist who resort to qiyas takes it for granted that the rules of Shariah follow certain objectives (maqasid) that are in harmony with reason. A rational approach to the discovery and identification of the objectives and intentions of the Lawgiver necessitates recourse to human intellect and judgement in the evaluation of ahkam. ... Since an enquiry into the causes and objectives of divine injunctions often involves a measure of juristic speculation, the opponents of qiyas have questioned its essential validity. Their argument is that the law must be based on certainty, whereas qiyas is largely speculative and superfluous. ... It is once again in recognition of this element of uncertainty in qiyas that the ulama of all the juristic schools have ranked qiyas as a 'speculative evidence'." [Kamali, p. 267]
"From an epistemological point of view, the most important feature of the judgments concluded through analogy by 'illa is their being disputable. This results not only from the fact that the 'illa, by means of which these judgments are arrived at, can never be fully established or shown to be true, therefore giving rise to different conceptions as to what constitutes a proper or acceptable 'illa." [Shehaby, p. 42]
One of the problems our classical scholars have dealt with is how to apply the hadiths pertaining to what they identify as riba al-fadl, riba applied to a number sales/barter transactions. As they turned to qiyas, they had to come up with an applied understanding of the illah (effective or efficient cause; ratio decidendi) for the prohibition, so that it can be determined whether the prohibition's scope is greater than what the specific hadiths explicitly mention. Anyone who claims that hadith actually defines what is prohibited should also put the challenge in perspective, as even the classical scholars as well as the respective madhahib (schools) of jurisprudence have not been able to resolve. [See Engku Ali, undated]
The specific hadiths in question identify six specific commodities: barley, date, wheat, salt, gold and silver. The first issue is whether the prohibited riba covers only these six commodities or more. The Zahiris, a literalist school, does not recognize qiyas as a valid methodology of Islamic law. Therefore, there conclusion is simple. The prohibition of riba applies to only these six commodities, specified by the Prophet. No one has the authority to include anything else the Prophet has not.
On the basis of the six commodities enumerated by the Prophet there arises another question: why only these 'six commodities' were named? There were other things also that were bartered in Arabia both in kind and on credit, such as, camel, sword, armour, clothes etc. The Prophet could have named those things as well. Fuqaha have given different answers to this question:a. Allamah Dawud al-Zahiri and other Zahirites opine that there is riba only in these six things, i.e., barley, wheat, dates, salt, gold and silver, and there is no riba in the remaining things. The only rational objection to this opinion is that rice, pulses, sugar have the same qualities that are found in barley and wheat etc., then why is there no riba in them? This is the reason why other fuqaha have looked for other reasons. [Suhail, p. 88]
It is important to note that the Zahiris have a good point here. If the Prophet really wanted to use these six things as merely examples, from which an underlying rule is to be deduced, then where is the indication of it in any of the hadiths that deal with 'six commodities'? Instead of using six specific commodities, would it not have been more indicative, if even just one or two were mentioned, or an indicative expression - such as, for example, like - were used?[12]
The four orthodox schools recognize qiyas as a valid methodological tool of Islamic jurisprudence. Therefore, they do engage in finding the effective cause or illah to identify additional or new situations to which the prohibition may apply. Quite interestingly, four schools reach three (or four) different conclusions.
b. According to Imam Shafi'i, edibility is the cause of riba in the first four of the mentioned articles, and valuability [bearing a value] is the reason in the remaining two.
There are two objections to this definition: there are many other things which have edibility such as meat, vegetables, fruits, milk. Then why did the Holy Prophet not mention them?
Secondly, no common reason for these six things has been mentioned. Otherwise everything has one or the other distinctive quality.
c. In order to eliminate these objections, Hanafi fuqaha traced a common feature in the 'six commodities,' that is, measurability and weighbility, and held this to be the reason for riba.
But the fallacy of this approach is so obvious that it does not require much argument. We admit that those six commodities were sold by weight or by measures, but this common feature should have something common with riba. The logic here is this: all crows are forbidden and all crows are black, so the black colour is the reason for prohibition!
...
d. In the opinion of Imam Malik, there is riba in storable [non-perishable] edibles only and there is no riba in any other commodity. As for gold and silver mentioned in the hadith, it is secondary, that is, in itself it is not a cause for riba but as they are used as a means to buy storable [non-perishable] edibles so they have been mentioned in the hadith as a means to buy non-perishable edibles. [Suhail, pp. 88-89]
Hanbali opinion is similar to the Shafi'i's. [Engku Ali]
Mohammad Obaidullah, an Islamic economist and a promoter of Islamic finance, attempts to present the diversity of opinions in more modern terms. However, the diversity of opinion is still obvious. Readers should draw their own conclusion whether this diligent search for illah (effective or efficient cause) leads to a harmonious definition or not, as boldly claimed by Abdulkader Thomas.
"The Shafi’i school of fiqh considers the efficient cause (illah) in case of gold and silver to be their property of being currency (thamaniyya) or the medium of exchange, unit of account and store of value.** However, the efficient cause (illah) of being currency (thamaniyya) is specific to gold and silver, and cannot be generalized. That is, any other object, if used as a medium of exchange, cannot be included in their category. Hence, according to this version, the Shariah injunctions for riba prohibition are not applicable to paper currencies. The Maliki view also considers the efficient cause ( illah) in case of gold and silver to be their property of being currency (thamaniyya) or the medium of exchange, unit of account and store of value. However, according to this view, even if paper or leather is made the medium of exchange and is given the status of currency, then all the rules pertaining to naqdain, or gold and silver apply to them. Thus, according to this view, exchange involving currencies of different countries at a rate different from unity is permissible, but must be settled on a spot basis. As far as Hanbali view is concerned, different versions attributed to Ahmad Ibn Hanbal have been recorded as documented in al-Mughni by lbn Qudama. The first version is similar to the Hanafi version while the second version is close to the Shafi’i and Maliki version.**" [p. 7]
Also, pertinent in this context is The Text of the Historic Judgment on Interest by the Supreme Court of Pakistan, a relevant part of which was authored by Justice/Mufti Muhammad Taqi Usmani. Usmani is one of the leading religious experts on Islamic finance and much sought after by Islamic financial institutions for their Shariah Boards. In the Historic Judgment, he identifies excess over principle as the illah.
"... [T]he application of a law depends on the Illat and not on the Hikmat. ... The Illat (the basic feature) on which the prohibition is based is the excess claimed over and above the principal in a transaction of loan, and as soon as this Illat is present, the prohibition will follow regardless of whether the philosophy of the law is or is not visible in a particular transaction. [Supreme Court of Pakistan, see the segment "Basic cause of prohibition"; link for the online document is provided in the bibliography]
Several points to be noted. First, illah here is categorically delinked from hikmah or underlying wisdom/rationale. A rather dangerous proposition, reflecting a purely legalistic approach. Also, quite typical to many religious scholars, Mufti Usmani discusses the difference between illah and hikmah without mentioning that his analysis reflects only the Hanafi and Shafi'i position, but not Maliki and Hanbali position.
The majority view maintains that the rules of Shariah are founded on their causes (ilal), not in their objectives (hikam). From this, it would follow that a hukm shar'i is present even if its 'illah is not, and hukm shar'i is absent in the absence of its 'illah even of its hikmah is present. The jurist and the judge must therefore enforce the law whenever its 'illah is known to exist regardless of its hikmah. ...
The Malikis and the Hanbalis, on the other hand, do not draw any distinction between the 'illah and the hikmah. In their view, the hikmah aims to attract an evident benefit or preventing an evident harm, and this is the ultimate objective of the law. When, for example, the law allows the sick not to observe the fast, the hikmah is the prevention of hardship to them. Likewise the hikmah of retaliation (qiyas) in deliberate homicide, or of the hadd penalty in theft, is to protect the lives and properties of the people. Since the realisation of benefit (maslahah) and prevention of harm (mafsadah) is the basic purpose of all the rules of Shariah, it would be proper to base an analogy on the hikmah. ...
The Hanafis and the Shafi'is, however, maintain that 'illah must be both evident and constant. In their view the 'illah secures the hikmah most of the time but not always." [Kamali, pp. 276-277]
Thus, the position Mufti Usmani articulates is essentially Hanafi and Shafi'i, but Mufti Usmani does not disclose that in the Historic Judgment. Indeed, this kind of tendency to delink the injunctions from its hikmah has a religious-dogmatic dimension. Some scholars have even aversion to any kind of search for wisdom or rationale behind any injunction. Al-Shatibi, a prominent Islamic scholar of 14th century AD, regards such search for wisdom/rationale repugnant to one's sincerity in obeying God.
"Al-Shatibi suggests that one should not look to the motives and objectives of the injunctions. A believer should surrender himself to the will of God. The divine injunctions, are, in fact, the manifestation of the divine will. He presumed that looking to the motives and purpose of injunctions is repugnant to sincerity in the obedience to God. This is because he abides by a rule of law for the sake of its motive and not for the sake of God." [Hasan, 1986, p. 164; quoting al-Shatibi, al-Muwafaqat, Tunis, 1302 AH, I, 125, 130-31]
Secondly, the illah is identified as "excess claimed over and above the principal in a transaction of loan." However, there are hadiths that contradict such grand assertion, because the Prophet himself has paid extra above the principal. We cited earlier, ”Every loan that attracts a benefit/advantage is riba.” [see n#3-4 above]
A third and quite illuminating aspect is an illustration used by Mufti Usmani, which shows how shallow arguments can be used by such people who are considered among leading or foremost authorities. Usmani explains why zulm (injustice or oppression) can't be accepted as illah.
"The principle is that the application of a law depends on the Illat and not on the Hikmat. In other words, if the Illat (the basic feature of the transaction) is present in a particular situation while the Hikmat (the wisdom) is not visualized, the law will still be applicable. This principle is recognized in the secular laws also. Let us take a simple example. The law has made it compulsory for the vehicles running on the roads to stop when the red street light is on. The Illat of this law is the red light, while the Hikmat is to avoid the chances of accidents. Now, the law will be applicable whenever the red light is on; its application will not depend on whether or not there is an apprehension of an accident. Therefore, if the red light is on, every vehicle must stop, even though the roads of both sides have no other traffic at all." [section 119]
Let's scrutinize this example of red light as illah. Yes, law requires that all vehicles must stop at the red light, regardless of whether other sides have any traffic or not. However, when this rule (and it is a very important, generally life-saving rule) is delinked from hikmah (wisdom) the life-saving rule can become a life-claiming rule. Suppose a vehicle has stopped at red light. There is no other traffic from any other direction. However, a tornado is right behind the stopped vehicle. Illah (delinked from wisdom) would indicate that the vehicle still must wait. Period. However, illah (still connected with the wisdom) would dictate that the vehicle may ignore the red light (even at the cost of a traffic citation). If this example of red light is taken seriously, then under certain circumstances, the life-saving red-light can be life-claiming. If such an illah can be identified that could be applied like a robot (without any human judgment or wisdom) that would be really welcome. However, this is precisely where legalism fails us by insisting on such robotic, precise, invariable illah. That such pitiful reasoning comes from eminent (and currently among the highest paid Shariah experts in the Islamic finance industry) is a matter of great concern.
Fourthly, using this 'illah and hikmah distinction he makes another argument that undermines the very Qur'anic concept of justice ('adalah).
" ... after prohibiting the transaction of riba, the Holy Qur'an has mentioned the Zulm as a Hikmat or a philosophy of the prohibition, but it does not mean that prohibition will not be applicable if the element of Zulm appears to be missing in a particular case. The Illat (the basic feature) on which the prohibition is based is the excess claimed over and above the principal in a transaction of loan, and as soon as this Illat is present, the prohibition will follow regardless of whether the philosophy of the law is or is not visible in a particular transaction." [Supreme Court of Pakistan, Section 120]
"Any relative term which is ambiguous in nature cannot be held to be the Illat of a particular law because its existence being susceptible to doubts and disputes, it would defeat the very purpose of the law. The Zulm (Injustice) is a relative and rather ambiguous term the exact definition of which is very difficult to ascertain. Every person may have his own view about what is or what is not Zulm." [Section 121]
If the above assessment of the notion of justice/fairness (adalah) is correct, then basically the kind of pristine Islamic concept of justice as mentioned in the Qur'an does not really have any functional relevance. The Qur'an categorically calls for justice as one of its hallmark principles and values.
"O ye who believe! stand out firmly for justice, as witnesses to Allah, even as against yourselves, or your parents, or your kin, and whether it be (against) rich or poor: for Allah can best protect both. Follow not the lusts (of your hearts), lest ye swerve, and if ye distort (justice) or decline to do justice, verily Allah is well-acquainted with all that ye do. [4/an-Nisa/135]
"O ye who believe! stand out firmly for Allah, as witnesses to fair dealing, and let not the hatred of others to you make you swerve to wrong and depart from justice. Be just: that is next to piety: and fear Allah. For Allah is well-acquainted with all that ye do." [5/al-Ma'ida/8]
The Qur'anic call to stand for justice presumes that people know and understand what justice is. If justice (or injustice) is such an elusive, ambiguous or relative thing, then basically such a clarion call is rendered vacuous. Mufti Usmani may not have thought of such ramifications in writing the Historic Judgment.
Fifthly, as qiyas as a methodology of human reasoning, the search of illah as part of that methodology is essentially speculative. However, Mufti Usman's position is a typical orthodox position, where there is arbitrariness in the determination of illah. In the Qur'an, the principle is laid out: wa 'in tubtum fa-lakum ru'usu amwalikum la tazlimuna wa-la tuzlamun; that is: "(a) if ye turn back, ye shall have your capital sums: (b) Deal not unjustly, and ye shall not be dealt with unjustly." [2/al-Baqarah/279] However, the part (a) is recognized as illah, delinking it with part (b). This is an unacceptable approach.
"Jurists ... generally do not discuss why one person would want to sell a measure of wheat for an equal measure of wheat, particularly on an on-the-spot basis. It seems that the intended meaning of the hadith was not very clear even to many jurists. For instance, some jurists thought that the prohibition of riba in what came to known as riba al-fadl (riba involving an excess in one of the countervalues mentioned in the hadith) was to be observed and complied with ... without probing into the reasons for the prohibition. For these jurists, as reported by Rida, the purpose of the prohibition of riba al-fadl was not comprehensible but still had to be complied with.
This confusion among jurists appears to have been due to their total disregard for the rationale (hikmah) of the prohibition of riba." [Saeed, p. 32]
Notably, the "reason why the scholars have regarded hikma as minor and unimportant appears to be that the 'illa could be used objectively and easily ... a decision arrived at on the basis of 'illah could remain 'immutable'." [Saeed, p. 36] However, the result of the delinking of the illah (efficient cause) and hikmah (rationale/wisdom) caused noticeable disagreements as to how to apply qiyas to riba, especially in riba al-fadl. Indeed, often the conclusions various schools are so remarkably divergent/contradictory.
The inadequacy of the 'illa approach is glaringly obvious in the discussion of riba in both the early and the modern period. In the case of riba as prohibited in the sunna for instance, each school of law arrived at an 'illa which had nothing to do with the circumstances of the transaction, the parties thereto, or the importance of the commodity to the survival of society. There was no emphasis on the moral aspect. This approach, which could be described as superficial and devoid of moral and humanitarian considerations, led to some amazing conclusions by several jurists. Coins like fals (note: a unit of currency made of a metal which is not gold or silver and was used in some parts of the Muslim world), for instance, did not involve riba, according to Shafi'is. Thus, one hundred fals could be exchanged for two hundred either on the spot or on a deferred delivery basis. If this is maintained, then obviously today's fiat [i.e. paper] money could also be put in this category, since it is neither gold nor silver currency. Commodities which were countable, like apples or eggs, did not involve riba, and hence could be exchanged less for more, according to some jurists. A piece of cloth could be exchanged for two pieces of the same quality and measure since it was neither 'currency' nor 'measurable' nor 'weighable', nor a 'foodstuff'. A commodity to which the 'illa did not apply could not be susceptible to riba (mal ribawi) whatever the importance of that commodity to the well-being of the community. ...
The lack of moral emphasis in the juristic interpretation of riba has also led to some other unfortunate developments as in the case of riba-related hiyal. From the medieval period to the present day, it has been possible to advance loans at exorbitant rates of interest using fictitious transactions. Similarly, the six commodities and other goods likely to involve riba could be exchanged. Many jurists would not regard such acts as reprehensible since they are perfectly in line with their legalistic thinking. These jurists accord greater importance to the legal form of the transaction than to the moral consequences. As long as the transaction literally does not fall into the definition of riba, as provided by each school of law, the transaction would not be regarded as such." [Saeed, pp. 37-38]
So, those who regard "edibility" as 'illah do not consider cloth subject to riba. For them, eggs, apples, chili pepper, onions would be covered by riba because of edibility. However, for the Malikis, these items would not be subject to riba because these are NOT storable (non-perishable) edible.
These problems are due to the fact that in general the Muslim jurists were not interested in the underlying reason behind the original illah.
"It should be made clear at the outset that on the whole, Muslim legal theorists were not basically interested in analyzing the ways for discovering the reason why a certain judicial judgment was stated. Rather they were looking for some methodological rules that would help them in deciding whether to accept or reject a given 'illa." [Shehaby, p. 37]
Are we, thus, any better off in using 'illah without any reference to hikmah (rationale/wisdom), as articulated by Mufti Usmani in the Historic Judgment? Are we any closer to a definition, as claimed by Abdulkader Thomas? Fazlur Rahman, an eminent scholar of twentieth century, aptly summed up the result of his careful and thorough analysis of the hadiths pertaining is riba: “In short, no attempt to define riba in the light of Hadith has been so far successful.”[13] Of course, we haven’t even added yet those hadith that make deriving any criteria or illah much more difficult. For example:
Narrated Sa'id ibn Zayd: The Prophet said: The most prevalent kind of usury (riba) is going to lengths in talking unjustly against a Muslim's honour. [Sunan Abu Dawood, Vol. 3, Book 41, #4858][14]
The reality with qiyas as applied to riba in search of the illah (efficient cause) illustrates the fundamental pitfall with the traditional approach that has broadened the scope of riba throughout history. Zaki al-Din Badawi’s comments aptly sum up the problem. He was a noted Egyptian scholar in 20th century, who first held the view that was similar to Sanhuri’s, in the non-orthodox tradition of Abduh, Rida and so on, but subsequently retracted his position and went back to the orthodox position with broad scope of prohibition of riba, including interest on loan in modern times. After analyzing the utterly conflicting positions of various schools on illah for riba, Badawi admits:
“... [T]he underlying causes determined by the jurists, who uphold [the validity of] analogy, collapsed – using the terminology of Ibn Rushd, the philosopher – almost in their entirety. The reason is that not only did the jurists of each school save back any energy in criticizing and demolishing the causes determined by the others, but the Zahiris refuted the arguments too.”[15]
Indeed, failure to establish any unique illah became a test case of qiyas as a methodological tool, because this is a probabilistic tool to begin with. Illah as a tool simply did not work in case of riba.
Some of them made an effort to explain the reason for this vacillation with respect to the illah of riba. Thus, al-Muqbali says in al-Bahr, ‘The prohibition has various reasons.’ The summary of his statement is: It exists either for a meaning found in the same object for which the hukm has been laid down, and there is no basis for a disagreement in this, but the question here is whether this meaning is indicated by an evidence that is probable? They did not come up with an evidence for this, but argued on the basis of the process of elimination (sabr). This is like saying that the illah is this as well as this, and then declaring all as invalid, except one, which is determined to be the illah. It is well know that his method yields merely a probable illah. The original rule operating is that there is no illah and it is believed that the Shariah does lay down an illah as a whole, but as long as there is no evidence pointing to an illah it will amount to ritual [not-rational] obedience, because this is the meaning of there being an illah and not that it has no illah at all.[16]
Claiming that interest is prohibited because of the Qur'anic prohibition on the basis of "no excess over the principal", but delinked from "Deal not unjustly, and ye shall not be dealt with unjustly" - both in the same verse - is an eye-opening illustration of a mechanical and legalistic approach, where it is expressly asserted that the jurists' task is to apply illah without any regard to rationale or wisdom. Thus, while the exponents of Islamic finance and banking routinely offer pious statements about Islam's prohibition of riba (and interest, as part of the riba-interest reductionism) based on the injustice and exploitation argument, when it comes to the application, suddenly injustice and exploitation become immaterial or irrelevant. [see Farooq_2, "Exploitation, Profit and the Riba-Interest Reductionism"]
V. Conclusion
The limited purpose of this essay is to explore whether the commonly cited hadiths to define riba actually do the job as claimed. While the prohibition in the Qur'an can be easily understood in the case of riba al-jahiliyyah, and the rationale for it is unmistakably clear, all the hadiths cited to define riba and especially to broaden the scope to show that interest in the modern economy in all its form (including interest in a competitive, regulated environment) is prohibited is a daunting task indeed.
Readers might remember that Abdulkader Thomas, an expert in Islamic finance, asserted that these "six" hadiths define what is prohibited as riba. Of course, it is not just Thomas, but also the orthodoxy uses these hadiths to attempt to define riba. But in light of the analysis here, let it be left with the readers to draw their own conclusion whether these hadiths really define what is claimed as prohibited in our contemporary context.
[1] Quoted in Abdulkader Thomas (ed.) Interest in Islamic Economics: Understanding Riba [Routledge, 2006, p. 63]
[2] Wikipedia link; direct quotation from Ibn Hajar is needed and once secured, it would be added here.
[3] It was only recently that I started noticing the new translation “rigorously authenticated” for sahih. Reputable scholars and academics in their works have rarely used such more presumptuously translated terms. There are even some additional problems with the usage of such translations that appear mostly in non-scholarly works. Those who have begun using it do not provide any rationale for using new translation, instead of the terms commonly used by the scholars. For more, see Mohammad Omar Farooq, Sahih as 'Rigorously authenticated' and Hasan as 'Authenticated': Unwarranted translations and creating misperceptions [IBFnet, November 21, 2006, message #5722]
[4] For detailed references, see Abu Eesa. "The Use of Certain Weak Hadīth in Promoting a Ribā-Free Society"
[5] Al-Asqalani, al-Hafiz Ahmad Ibn Hajar, Bulugh al-Muram min Adillat al Ahkam, (multilithed material, I 25), quoted in Emad H. Khalil, “An Overview of the Sharia’a prohibition of riba,” in Thomas, p. 67, n38. A similarly reported from Ibn Abidin, Radd al-Muhtar, sharh tanwir al-absar, Kitab al-buyu, Bab al-murabahah wal-tawliya (Beirut: Dar al-Kutub al-ilmiyay, 1994, vol. 7, pp. 294f (ed.), quoted in Suhail, p. 83. For more details, see Farooq, Stipulation of Excess in Understanding and Misunderstanding Riba: The Al-Jassas Link, n#19, 20.
[6] See Ust Hj Zaharuddin Hj Abd Rahman, “A Look At Issue Of Riba,” August 24, 2005, RHB Islamic Bank; Guidance Financial, Canonical Shariah Contracts applied to Modern Finance, slide 23. Even Mufti Muhammad Taqi Usmani, quoted this in the The Text of the Historic Judgment on Interest, item #101 [1999; exact date: 14 Ramadan, 1420], while acknowledging that this is a disputed hadith at best [#102-#103].
[7] Quite interestingly, while there are quite a few hadiths about qard (debt) in hadith, there does not seem to be any hadith referring to qard al-hasana, the expression in the Qur’an. I have searched the concordance of nine major hadith collections (Bukhari, Muslim, Abu Dawood, Nasai’, Tirmizi, Ibn Majah, Muwatta, Musnad Ahmad and Darimi): al-Mu`jam al-Mufahras li-alfaz al-Hadith. If anyone is aware of such occurrence in hadith, please let me know. Why does the Qur’an refer to qard al-hasana, but the expression does not occur in hadith? One plausible reason is that qard is much broader than qard al-hasanah. While any excess payment on qard al-hasana (a charitable loan of benevolence) does not make any sense, and thus the prohibition of any excess is quite meaningfully covered in the Qur’an, the same may not apply to qard in general.
[8] http://finance.groups.yahoo.com/group/ibfnet/message/5773.
[9] Bankrate.com, http://www.bankrate.com/brm/news/auto/car-guide-2004/trade-or-sell1.asp.
[10] http://en.wikipedia.org/wiki/Coincidence_of_wants.
[11] http://finance.groups.yahoo.com/group/ibfnet/message/5840.
[12] It is argued that, even with the validity of qiays as a source of Islamic jurisprudence accepted, extending the prohibition beyond the six commodities may violate one of the conditions for valid qiyas. "The fifth condition for the validity of qiyas is that the wordings of law of the original case should not be changed after the causation. The reason is that a textual injunction is prior to qiyas in respect of letter and spirit. Qiyas is not valid in the presence of a textual law. Similarly, it is not valid if the words of the law of the original case are changed. ... [for example] ... The Prophet has allowed to kill only five reptiles specified by him within the premises of haram (sacred territory at Mecca). The analogy of these reptiles cannot be extended to other animals because the causation changes the words of the text. As such, the number of animals exempted by the Prophet will be more than five. Hence this cannot be allowed." [Hasan, 1986, p. 23]
[13] p. 20 in the online Word document.
[14] The text in the original Arabic book is: “Inna arbar riba al-istitalah fi ‘irdil muslimi bi ghairi haqq.” [Vol. II, #4876.]
[15] Badawi, online, p. 189.
[16] Badawi, online, p. 190.
Essay Written By:
Dr. Mohammad Omar Farooq
Royal University for Women
Courtesy: http://www.globalwebpost.com/farooqm/writings/islamic/riba-hadith.doc.
Royal University for Women
Courtesy: http://www.globalwebpost.com/farooqm/writings/islamic/riba-hadith.doc.
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