Prohibition of interest in Islam and role of Islamic banks in eliminating interest [1] The gravest but least addressed

problem facing Muslim Ummah today is prevalence of interest-based banking in Muslim world. Quraan orders believers to fear Allah and give up interest, holds giving up of interest to be a sign of fearing Allah and condition of Imaan and warns offenders of war from Allah and His Rasool saws. According to a hadeeth adultery and interest invite Allahs anger. Allama Iqbal severely condemned bank interest holding it to be a tool of exploitation, source of financial miseries and cause of moral degradation. He said that intellect, culture and religion have no meaning until interest-based banking system is demolished. Syed Qutab Shaheed held that Islam and interest cannot co-exist and that obedience of Allah and Rasool saws was inconceivable in the society in which interestbased system prevails. Quaid-e-Azam in his speech at the time of inauguration of State Bank in 1948 urged to mould economic system of the country on Islamic principles. It is a matter of shame and irony that in spite of what is said above interest-based banking prevails in Muslim world that keeps Muslim Ummah at war with Allah and deprived of His blessings. Consequently, despite having vast areas of land with immense wealth of natural resources, Muslim Ummah remains weak, oppressed and humiliated. Obviously eliminating interest in Muslim world is the first and foremost essential step for Muslim Ummah to gain strength and respectability. [2] In Islamic Summit Conference held in Lahore in 1974 it was decided to promote socioeconomic co-operation among Muslim countries according to Islamic principles. In 1975 Islamic Development Bank (IDB) was established in Jeddah with the purpose to foster the economic development and social progress of member countries and Muslim communities individually as well as jointly in accordance with the principles of Shariah. The selected paper on interest-free banking presented in the First International Conference on Islamic Economics held in Makkah in February 1976 urged to introduce a system of interest-free banking not as a supplement to but as a substitute for prevalent system of banking. In the conference communiqu it was recommended that all Muslim countries should make their laws as well as social and economic institutions conform to the principles of Islam. IDB prize winner in Islamic banking, Dr. Ziauddin Ahmad in his speech in the prize ceremony in 1991 raised the core issue what concrete steps can be taken to better attune the Islamic Banks for playing a more dynamic role in the attainment of Islamic socio-economic objectives. [3] Unfortunately Islamic economists and bankers have ignored the above deliberations for finishing interest and achieving Islamic socio-economic objectives. Interest-free banking as substitute for conventional banking has not so far been introduced. However, in the last 31 years more than 200 Islamic Banks have emerged. They have mobilized billions of dollars and are prospering in 70 countries due to Islamic sentiment of their clients. As Islamic banks do not provide interest-free loans, they are supplement to and not substitute for conventional banks and that is why they have produced no dent in interest-based banking and there is no sign of elimination of interest in any Muslim country. In response to Pakistans urgent request for funds in 1998, IDB and several other Islamic banks could offer only interest-bearing loan at 5% above LIBOR! Islamic banks do not provide loans even to one another. In his book Introduction to Islamic Finance M. Taqi Usmani writes:

The case of Islamic banking cannot be advanced unless a strong system of inter-bank transactions based on Islamic principles is developed. The lack of such a system forces the Islamic banks to turn to the conventional banks for their short-term needs of liquidity which the conventional banks do not provide without either an open or camouflaged interest. M. Taqi Usmani is Chairman or Member of Shariah Boards of a dozen or more Islamic Banks. His realistic comment and sad instance of 1998 mentioned above highlight the necessity of interest-free lending by Islamic banks. [4] Loan is indispensable need of mankind. Trade, Industry, Governments and Welfare Organizations very frequently and rich persons occasionally need loans. As Islam caters for all needs of mankind a Hadeeth e Qudsi strongly commends interest-free loan by declaring reward for qard is 18 times implying that Islam wants extensive use of loans in society. Our Prophet saws himself bought edibles on credit and borrowed money for State purposes. Several Sahaba Karam ra took loans for doing business and Imam Abu Haneefa ra did business with borrowed money. It is not understood why Islamic Banks ignore Hadeeth e Qudsi and exclude loans from their operations. It is a gross misconception that ideal Islamic alternative of interest is profit sharing. Islam prohibited interest, permitted Mudarabah and Musharikah which were in vogue in pre-Islamic era and highly commended interest-free loan. Thus interest-free loan is the ideal Islamic alternative of interest. Moreover, as interest is a lending device, its alternative can only be an interest-free lending device just as the only alternative of zina is nikah. Surprisingly present Islamic economists and bankers do not realize that interest cannot be finished without providing interest-free loan facility to loan seekers just as zina cannot be finished without providing nikah facility to all men and women. [5] If the aim of Islamic banks is not only to make money but also to play effective role in finishing interest, then they must arrange to provide interest-free loans on as large a scale as loans are provided by interest-based banks. It can profitably be done on the basis of an interest-free lending device TMCL (Time Multiple Counter Loan). This novel interest-free Islamic lending device that can perform all functions as are performed by interest in the present system was invented by late Professor Sheikh Mahmood Ahmad applauded in Pakistan Supreme Court judgment of December 23rd 1999 as our countrys most outstanding economist, researcher and leading thinker had devoted considerable part of his life to the study of the theory of interest. [6] TMCL transaction comprises two simultaneously exchanged interest-free loans between two parties such that the multiple of the amount and period of one loan equals the multiple of the amount and period of the other loan. It facilitates interest-free loans of large sums against counter loans of much smaller sums advanced for proportionately longer periods. For example a trader can get interest-free loan of Rs. 10 million for one year by advancing counter-loan of Rs. 1 million to the bank for ten years. Thus TMCL fulfills the clients need of funds and enables the bank to cover its expenses and earn profit for its share holders and depositors by long term investment of counter loan amounts. TMCL-

based transaction is just and equitable as in this transaction, unlike interest-based transaction, none of the two parties is a definite gainer or loser and each one of them may gain or lose by investing the loan amount borrowed from the other party. As in TMCL transaction both parties do good to each other it conforms with Quraanic precept hal jaza ul ihsan illa al-ihsan and the noble teaching of our Holy Prophet saws that a favor done should be reciprocated. Hence putting it into practice will have Allahs blessings and bring prosperity to the people. Briefly following are sufficient proofs of validity of TMCL in Islamic finance and Shariah:a. 17 member Panel of Senior Bankers and economic experts in its report of January 28th 1980 advised Council of Islamic Ideology about TMCL: It has been suggested here in view of its potential usefulness for consideration of the council subject to its permissibility under the Shariah. b. Council of Islamic Ideology did not find any Shariah objection on TMCL and in its report of June 15th 1980 recommended adoption of TMCL principle by banks to provide loans to account holders for personal and non-productive purposes. c. TMCL-based interest-free banking plan was presented and explained in detail during the hearing of Riba case by 5 member Supreme Court Shariat Appellate Bench including two Islamic Scholars, M. Taqi Usmani and Dr. Mahmood Ahmad Ghazi. No objection on TMCL was raised by any judge during the hearing. TMCL plan is also described without any adverse comment in the Supreme Court Shariat Appellate Bench unanimous judgment of December 23rd 1999. d. Extract from Kuwaiti Finance House Fatwa No. 162:Question No. 4: Is it permissible that I take loan of 1000 Dinars for 1 year from you on the condition that I give a loan of 3000 Dollars to you for 1 year? Reply: It is permissible. [7] Full Information on working of TMCL-based interest-free banking and its socioeconomic benefits for Muslim Ummah are available on web and with the writer who will welcome any queries and comments on the subject. All those concerned with Islamic banking are requested to give serious consideration to do the needful to get Muslim Ummah rid of interest and be rewarded by Allah for this noble deed Ameen.

Abdul Wadood Khan Email: aw_khan@hotmail.com Web: www.realislamicbanking.com www.geocities.com/aokhan2/index.htm

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