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I s Today’s I nterest Disallow ed?

Quest ion a nd an sw er det ails

N am e of Qu estioner:

Muham m ad

 

Reply dat e:

2011/ 07/ 12

Quest ion:

As- salam u ` alaykum . I had a discussion with a friend who is working

for a bank. He is w orking in

corporat e sect or as opposed t o t he

consum er sect or. According t o him , corporat e sect or job in a bank is

fine since t here is no exploit at ion of client by t he bank as t hey w ant t o

est ablish long t erm explanations based

relat ions on w hich

w it h t he bank. He also gave ot her I w ill ask som e quest ions. 1. According t o

him , int erest is only pr ohibit ed if it is ex ploit at iv e. Prov ision of un -

exploit at ive finance w it h a ret urn for opport unit y cost for t hat finance is not haram . Kindly define riba and is current int erest charged t oday

by bank s int erest?2.

Also w ould t hen by t his logic w ork ing in corporat e

sect or job in a bank w her e y ou giv e loan t o corporat ion fine?3. Also he

said r iba defined by t he Qur ’an

is ex cess r et ur n, is it t r ue?4. Last ly

according t o him , if w e ban activity. We cannot prosper.

int erest , t hen t here w ill be no com m ercial And I slam only wants redistributive

justice. By declaring today’s interest haram , we are m issing whole point.

con sult an t:

Monzer

Kahf

An sw er

Wa ` alaykum as- Salamu w a rahmatullahi wa barakatuh.

I n the Name of Allah, Most Gracious, Most Merciful.

All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.

Dear brother, thank you for your question that shows your interest to know more about Islam and its rules.

Regarding your question, what is prohibited in the Qur'an is exactly what is known as interest in the contemporary practices of banks, no distinction between individuals and corporations.

Responding to your question, Dr. Monzer Kahf, a prominent Muslim economist and counselor, stated,

These questions require essays not a simple Fatwa. I therefore will try to give brief answers and advise you to make some readings on this matter especially writings by me and Prof. Dr. M N Siddiqi.

1. Let us begin with the definition of riba. It is in fact given in the Qur'an

(2: 279) as any increment above principal in a debt or a loan. This verse establishes that repentance requires recovering back your principal, while verse (2: 275) says that sale is permissible, i.e., increment in the sale price above principal is excluded from the prohibition

This definition is also given in Fiqh being a conditional increment in a debt (for rescheduling) or when giving a loan. This means that what is prohibited in the Qur'an is exactly what is known as interest in the contemporary practices of banks, no distinction between individuals and corporations.

2. The same verse (2: 279) mentions that taking more than the principal is

injustice (zulm). This injustice is obvious in interest as it is a gain simply by virtue of a condition in the contract (remember that conditions in contracts are

subject to negotiation power) NOT BY THE VIRTUE OF A GROWTH OF ONE'S PROPERTY.

When a loan is given to a corporation the bank transfers its property from cash to a debt on the borrower, at the same time the borrower becomes the owner of the cash and under liability to the bank. The amount of money given to the corporation becomes its own and is used by it for business that may or may not give return. The corporation is entitled to the increment as much as it is the loser if there is a decline.

Justice requires that every person (whether legal or natural) should exclusively be entitled to all increment that happens in its property. In other words any increment created by using this money belongs only to the owner of the money which is the corporation and any claim otherwise is unjust. Such a claim (by the lender) violates the property rights of the corporation. This is the essence of injustice in riba/ interest.

3. It is scientifically incorrect to claim that interest is a mover of the economy.

What is a mover of the economy is the function of collecting the savings from small savers (income earners) and making them available to users (corporations and consumers). This function of financial intermediation is very important for any economy. Carrying this function through interest is not only unjust but also exposes the economy to mis-allocation of funds.

Take an example: a rich corporation who can give the bank good collateral but has a corrupt CEO, funds shall then be used for parties and bribes. The same

applies to rich natural persons in comparison with persons who have entrepreneurial ideas.

4. The alternative is channeling savings to persons who can actually use them in

beneficial manner. The best way then is to provide finance through contracts of

sale on credit, lease and venture capital. In this way of rechanneling funding (finance) we guarantee that purchased goods, leased machines and projects created with venture funds are actually used not leaking outside the economic cycle of goods and services.

5. In other words, interest is a bad allocator of resources because it gives them

to those who can provide collaterals and pay more instead of giving them to those who actually use goods, services and/ or create projects. This is injustice to the whole economy.

6. Take the case of rescheduling of debts and all debts transactions that occur

between banks. Do these transactions create wealth? They actually don't. Why do they carry interest then? Another form of injustice too!

7. Now working in a bank is a different story. While interest is haram

(impermissible), working in an interest -based bank in department that do not undertake any of the specific actions of making loans and other interest contracts is not haram (impermissible), simply because we canot expand the prohibition that came in the hadith which states that taking riba, giving it, writing it and being its witness are HARAM although we know that functions such as research, IT, physical services in banks, etc., serve the whole institution and they touch the haram but they do not do it per se.

Allah Almighty know s best.