The recent Global Financial melt down which brought the near crash of several financial institutions worldwide  especially in the US and Europe , highlighted the dangers of Derivatives as an investment option . Most of the Financial institutions that needed massive state Bail Out in order to remain solvent at the height of the turbulence , carried substantial portfolios of Derivatives which at a time of crisis demonstrated very cruelly that they were mere worthless pieces of paper  with really no asset value . 

A derivative is not a product that  most investors understand clearly  with reasoned comfort. There is little transparency  in this business and the product itself is something which  even dealers of  derivatives do not fully understand so as to be able  to explain with clarity the full product dimensions  . It is by and large shrouded in mystery and is confined to Dealing rooms of vendors of this highly speculative financial product . The hallmark of this market is the mystifying  jargon that  everyone in the derivative vending business  use when marketing it . 

One thing is sure , and is amply explained by its name ‘Derivative ‘. It is something that is derived from another transaction and  every derivative per se , therefore  is not asset based . Explained in simple English it is an intrinsically empty vehicle  that is bought , sold  and enlarged with layer upon layer of further derivatives heaped one on top of the other . The whole superstructure  lacking the robustness of a tangible asset , is built on nothing but  asset emptiness .

The Insolvent US and European  Financial institutions realized this simple truth only after they were brutally destroyed during the financial melt down and were forced to go cap in hand to the Central Banks to beg for financial mercy .The reason , Their huge investments in Derivatives which at the time of financial turbulence , were like worthless Junk Bonds . It was only a speculatively created paper asset .

The world and more specifically the US , was warned well in advance of the impending financial crisis as a result of extensive use of Derivatives , by no less a person  than the then head of the Securities Regulatory authority  in the US , Ms Brooksley Born . 

Brooksley Born finished a brilliant academic career in Law at one of the Ivy League Universities in the US . After several years of legal practice in leading Law firms in the US , she was appointed the head of the US Securities Regulatory Authority .

It was at this time that derivatives were enveloping  the financial world by storm         

and very surprisingly it was kept outside the scope of any financial regulator in the US .

This was during the Bush administration era when Allen Greenspan ruled the roost as the  unquestioned financial guru and wizard . His business philosophy on the regulation of financial products  and markets was a simple one . He said that there must be little or no regulation of  financial institutions by the authorities because mature  markets usually self regulate . Institutions  and financial products that fail , are speedily eliminated from the system in such markets and only the resilient ones survive . It was this Greenspan dogma that created a lot of space for derivatives to flourish in the US . 

Brooksley Born however had serious reservations about Derivatives .It had carved out a mega market presence in the US and at that time it was a US Dollar 595 Trillion

business . To put things in perspective , China which has the worlds largest foreign reserves , has a mere USD 2 Trillion as foreign reserves . Brooksley Born very clearly contended that Derivatives with that kind of a market impact had to be brought under her regulatory authority and as a first step researched deeply into the product and its  market dynamics  . The more she researched the more it became clear to  her sharp mind that Derivatives were a creaking time bomb .She found that nobody knew , not even the specialists in Derivatives , as to what was going on in the markets . She found that there was little or no transparency in this business , it was like a cult churning out magic portions from inside a big black box .She contended that this was plain vanilla speculation belonging to the same league as gambling .As a thorough bred professional Brooksley Born realized the danger Derivatives posed to  US financial markets and to the safety of  the Trillions of Dollars invested in it by millions of Investors . She pushed hard to regulate Derivatives .

 But regulation went against the philosophy of the Allen Greenspan school of financial management , and there was strong opposition from a lot of the lobby groups especially the big business raking in profits from vending Derivatives . Brooksley did not relent .

She wanted a Congressional hearing  to discuss the  issue in view of its massive financial ramifications .At the hearing  , Allen Greenspan argued for leaving Derivatives unregulated . He articulated that the successful growth of  US financial markets was possible because of the Laissez Faire  , non interventionist policies of successive US Governments . He concluded that if derivatives  thrive , then it is best left alone and that the market must determine its ultimate fate . 

Brooksly Born argued strongly for regulation . She argued that the USD 600 Trillion  financial behemoth had to be caged . She exposed the total lack of transparency in this business and brought to  the notice of those in government that no one really knew what was going on in this highly speculative trade . She warned that if the financial  bubble should burst with the USD 600 Trillion in the Balance sheets of Banks and financial Institutions , a nightmare scenario would emerge , bringing most US big business to its knees and unleashing in the process massive financial shock waves ..

The US administration was strongly under the spell of the Allen Greenspan philosophy and was unwilling to put its trust on the relatively inexperienced  Brooksly Born .It decided to accept the advice of  their venerated financial guru Allen Greenspan . Derivatives continued to flourish unregulated .

Not wanting to sit on top of a calamitous time bomb , Brooksly Born quit as the head of the Securities regulatory authority . 

About 10 years later , with the onslaught on financial markets by  the global financial melt down , the predictions and fears that Brooksly born articulated about Derivatives were coming home to roost .Top US decision makers belatedly realised  that Brooksley Born’s very good advice was mistakenly not taken by the US administration . It was too late . 

Very recently Al Jazeera TV broad cast a program on derivatives and interviewed Brooksly Born on what she articulated about Derivatives during her tenure as the Securities regulator . She held firm to the views she expressed at that time and sadly reflected that a lot of the financial pain the world had to endure , could have been avoided or minimized if only the US administration had paid heed to her advice .

Al Jazeera TV also interviewed Allen Greenspan who is now in retirement . He confessed that  Brooksly Born was absolutely correct in her assessment of derivatives and that his Laissez faire financial   Model  of  allowing  unregulated financial markets to operate unrestrained , was seriously flawed . 

From a Sharia perspective , derivatives have two toxic and Islamically prohibited features. Firstly derivatives are not asset based and they always ride piggy back on another transaction . Investors are therefore not clearly told what the transaction is  and this introduces a large element of Garrar into derivatives trading .If A top regulator of the US financial administration in the person of Brooksly Born could not understand the working dynamics of derivatives, there is no hope that the investing public at large would comprehend this complicated financial instrument . Garrar is rejected outright in Sharia and derivatives therefore have no place in Islamic finance.

Secondly derivatives are essentially a speculative product , and all forms of speculative business is strongly rejected in Sharia . Speculative trading is a manifestation of the age old practice of gambling .This is unequivocally prohibited in the Quran and in the traditions of the prophet . Muslim investors must clearly distance themselves from this very unislamic and dangerously toxic  business of derivatives trading .        

Sadly Derivatives are still being bought and sold  and I can only recall Lord Acton’s profound words of wisdom when he said “ History repeats itself ,once as a tragedy  and then as a farce

1. Subject: Prohibition of bank interest.
Question:
Is the use of Bank money permissible (Halal) or prohibited (Haram) ? Is what is taken of it for trade considered Riba or not (i.e are business loans taken from a bank at a fixed rate of interest considered to be Riba)?

Fatwa:
To take business loans from a bank at a fixed rate of interest, as is the custom now, is Riba which is altogether forbidden. Allah, the Almighty knows best.

Source:
Fatwas by the Egyptian Office of the Mufti, Supreme Council for Islamic Affairs; opinion given by Sheikh Bakri Al Sadafi, Egyptian Mufti, 27 Muharram 1325 A.H./1907 A.D.

2. Subject: Prohibition of investing deposited money for a fixed interest.

Question:
A person asks about the Shari’ah ruling on depositing the legacy of his deceased son’s two daughters in a bank for interest.
Fatwa:
Islamic law does not permit the investment of money in a bank at a fixed rate of interest because an investment such as this constitutes Riba which is prohibited by the Shari’ah.

Source:
Fatwa by Sheikh Abdel Majeed Saleem, Mufti of Egypt, 1348 A.H./ 1930 A.D
d
3. Subject: Interest of bonds- is a prohibited Rlba.
Question:
If one inherits from his father Cotton Loan Bonds on which the government pays interest, is the interest accrued considered a prohibited Riba ?

Fatwa:
This interest is a type of Riba prohibited by Allah the Almighty in His Holy Book.

Source:
Fatwa by Sheikh Abdel Majeed Saleem, Mufti of Egypt, 1362 A.H.11943 A.D.

4. Subject: Taking interest for money deposited in banks is prohibited; it may not be given as alms

Question:
Is it permitted to take interest for money deposited in banks and give it as alms to the poor ?

Fatwa:
Taking interest for’ money deposited in banks constitutes Riba and is prohibited. Giving this interest as alms is unacceptable to Allah, the Almighty. He who does so has committed a sin.

Source:
Fatwa by Sheikh Abdel Majeed Saleem, Mufti of Egypt, 1362 A.H.I 1943 A.D.

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THE TERMS ‘INTEREST’ AND ‘RIBA’ ARE NOT ENTIRELY SYNONYMOUS

The meaning & definition of Interest appropriate for our purposes is the one in common use, which happens to be a “surcharge on the repayment of debt (borrowed money)”, “rent paid for the use of money”, “The fee charged by a lender to a borrower for the use of borrowed money”, etc.

That is: a monetary charge applied for the use of money (the surcharge, rent or fee is money exchanged for more money in lieu of foregoing the use of the money by the lender and is stipulated in the lending agreement/contract either before or after the commencement of the loan).

The meaning & definition of Riba shows that a monetary charge applied for the use of money (i.e. Interest) falls within the sphere of Riba and therefore, the payment and receipt of Interest is forbidden.
However, although ‘Interest’ is Riba, Riba is not restricted to just ‘Interest’ and has a much wider sphere. Therefore, the terms Riba and Interest are not entirely synonymous, and although they are both forbidden, we should cease confusing one for the other as they both have other disparate meanings.

What is required here and in general is for us to understand the proper definitions of both Arabic and English words and make clear the differentiations between the words and not confuse them. This will greatly help in understanding the subject of Riba and many other topics related to Islamic law.

RIBA IS NOT JUST USURY

Usury is simply the rate of Interest which the law of the land has deemed to be excessive (and thus in some countries, illegal) – therefore it is Riba.

However, some people believe that because extremely low rates of Interest are not usurious, therefore this ‘low-rate’ Interest is not Riba. This is a fallacious argument because even a minute rate of interest is still a monetary charge for the use of money and is an ‘excess’ on top of the loan principal/debt obligation. This clearly makes it Ribawi.

IS COMPENSATION FOR INFLATION RIBA?

Inflation, in this context, is the depreciation of the purchasing power of a specific amount of money: measured at two (start & end) points of time (in the same currency and economic/regulatory zone) by purchasing the SAME products of the same quality and inherent (non-monetary) value at both time points.

Some amongst the Fuqa’ha argue that a lender lends money knowing that there could be an inflationary loss, so why should they be compensated for Inflation?  A few maintain the view that any payments to compensate for inflation is Riba.

Inflationary loss: the argument that lenders know that they could suffer inflationary loss and thus should not be compensated is negated if the lender agrees to lend on the basis that the full return of his principal must include compensation for any inflationary loss. This leads to our second point.

The view that compensation for inflation is Riba: a very simple definition of Riba is that it is an excess over (on top of) the loan principal. Compensation for inflation is merely ‘making up’ the loan principal to its original value (when it was lent) and is not an excess over it. Thus, compensation for inflation is not Riba.

The contention here is that by ascertaining the true economic value of a specific amount of money at the start and end time points, we can be fair and just when returning any money borrowed at the start point. If at the end point (when repaying the loan principal), there is a reduction of the purchasing power of the amount of money borrowed at the start point, then the true economic value of the amount borrowed at the start point is also reduced at the end point.

Thus, we should make-up this deficit of both purchasing power and economic value when returning the amount borrowed/owed to the lender/creditor so that they receive EXACTLY (and not anything more or less than) what they lent – otherwise the lender/creditor will suffer an unjust loss.

Consider the following: what if the loan payback time is not adhered to by the borrower and becomes an extraordinarily long period or if the economic situation of the country is such that it results in rapid increases in prices of goods and/or a forced devaluation of the national currency – what then?

For instance (an extreme example): a person lends £10 to another person for 1 month, 100 years ago – but the borrower did not repay that money. Now, 100 years later, one of the lenders descendents finds proof of the loan and asks one of the borrower’s descendents to pay back the loan (who agrees to do so).

Is it fair and justified for the borrowers descendent to repay just £10 or should he consider the fact that the value of £10, 100 years ago is actually the same as, say £1,000 at present time?

In that case, should he repay £10 or £1,000? Should the lenders descendent accept a potential (real) loss of £900? Remember, he is not asking for any profits (an increase on the loan principal), just that the lost value over time of the loan principal is made up. To reiterate: a monetary charge for the use of money (i.e. Interest) is not being asked for – simply that the full value of the original money is returned.

Now, if the value of the loan principal itself depreciates over time, then asking the borrower to make-up for this depreciation ONLY (i.e. as long as the lender does not profit from this compensation) is fair and justified, but anything over and above the depreciatory compensation amount is Riba and thus forbidden.

In the above example, as this was not a trade transaction (therefore taking a risk in losing his [the lenders] money was not part of the transaction), but a short-term loan transaction (which became severely delinquent), the lender is entitled to get his full principal back (in terms of the purchasing power and economic value). The contention here is that refusing to make-up the lenders loss is actually a form of Zulm in itself as it denies the lender the return of his full principal.

Some people accept the above argument but insist on calling this compensation for the reduction of purchasing power ‘Nominal Interest’. This is incorrect and we should cease calling it by this name.

‘Nominal Interest’ does not take into account the effects of inflation, but it is still an additional charge on a loan principal/debt obligation (i.e. direct Interest) and thus it is forbidden. Whereas ‘Real Interest’ does take into account the effects of inflation [Real Interest = Nominal Interest - Inflation], and it is also an additional charge on a loan principal/debt obligation but with inflation taken into account (i.e. it is inflation adjusted Interest) and thus it is also forbidden.

Only the ‘inflation’ component is not forbidden because it is not an additional (an ‘excess’ or an ‘increase’) over and above the loan principal or the debt obligation.

To avoid any such confusion, we should compensate for the reduction of purchasing power (of a given sum of money over a given period of time) caused by the ‘inflation’ of prices within an agreed economic & regulatory zone, on a completely independent and separate basis when writing lending/borrowing agreements – and not include it with any other agreements.

We should also give this compensation an independent name which will not give the impression that it is linked to Interest.

COMPONENTS OF INTEREST

Some people break-down Interest into various components and say that this part is Halal and that part is Halal and that only this small particular part is probably Riba. They use this complex and detailed argument to assert the view that the entire Interest charge cannot be therefore, considered Ribawi. We should accept this argument to a certain extent.

A modern day Interest charge has included within it a ‘profit margin’ for the lender and no matter how small this profit margin is – it is this that is regarded as pure Riba (see the above). However, it is true that a typical Interest charge is composed of several components and that individually and separately, almost all of them may be allowed (Halal or Mubah). However, the problem arises when all of these ‘allowed’ components are combined together as a single charge, because then, the payer does not know how much he is paying for what component (how much is legitimate administration costs? How much is compensation for inflation and on what basis is this calculated?).

As a consequence, the entire composition becomes subject to extreme Gharar and may be considered invalid. The way to avoid this Gharar is to separate out and to have individually negotiated agreements for each allowed component.

THE COMMIXTURE EFFECT

Furthermore, if these ‘allowed’ components are mixed with the disallowed ‘profit margin’ component – then the COMMIXTURE EFFECT comes into play, where:

If anything that is Haraam is mixed (even by an extremely minute quantity) with anything that is Halal (or even Mubah, neutral) – then this renders the entire thing Haraam.

This applies to the modern day Interest charge because the allowed aspects of it are mixed with the Ribawi aspects – thus making the entire Interest charge Haraam. Once this commixture effect is fully appreciated, then the argument that Interest=Riba can be seen in its proper context.

Without going too much into this argument, we can use an analogy to further illustrate this point.

Wine is forbidden in its entirety because it intoxicates. However, its constituents are Halal. Wine is made with grapes, water and sugar. Individually, none of the ingredients are specifically forbidden – but the end result (i.e. an intoxicating drink) is forbidden because it is now something that intoxicates when drunk (even if it doesn’t intoxicate, since it has the power to intoxicate then even a drop of it is just as forbidden as a whole bottle). Similarly, an Interest charge is forbidden in its entirety because some integral parts of it are equal to Riba.

However, as stated, most of the constituents of Interest (such as the creditor’s operational costs, inflation adjustments, etc) are individually and separately allowed – but the end result (i.e. a ‘higher value’ stipulated as a pre-condition to the agreement to exchange or subsequent to the conclusion of the exchange, i.e. an Interest charge) is forbidden because of the inclusion of one component – the direct ‘profit’ a creditor charges as compensation for it not having the use of the money.

If the direct ‘profit’ component was removed – the Interest charge itself would not be direct Riba. However, it still cannot be demanded by the creditor, but requested with full & proper explanation as to why the additional charge is justified (in Shari’ah). If the borrower does not accept the reasons – the creditor can opt not to lend to the borrower.

Thus, we have to look at the constituents and also the end product of any given transaction – and not take something out of its contextual environment – before making judgements on it.

Hence, breaking down Interest to Halal components and saying that as a result, Interest itself is Halal is akin to saying that since grapes, water and sugar are Halal – wine itself therefore, is also Halal (thus exposing the fallacy of such arguments).

This point nullifies most arguments against the ‘Interest=Riba’ position as the Interest that is Riba is not things such as operational costs, compensation for Inflation, etc – but simply the direct ‘profit’ a creditor charges as compensation for not having the use of the money. This compensation is usually stipulated/demanded by the creditor ‘as a pre-condition to the agreement to exchange or subsequent to the conclusion of the exchange’ – thus bringing Interest into the sphere of Riba.

RIBA IN NON-MUSLIM COUNTRIES AND BETWEEN MUSLIMS & NON-MUSLIMS

There is an argument from some people that it is permissible to engage in Ribawi activities if it is between Muslims and Non-Muslims and/or if done so in a non-Muslim country (Dar Al-Harb). However, this argument is based primarily on activities of the Prophet’s (pbuh) uncle, ‘Abbas ibn ‘Abd al-Muttalib.

The contention is that after he became a Muslim, Al-Abbas remained in Makkah (which, at that time, was still under the non-Muslims) and engaged in Ribawi transaction with some of the non-Muslims of Makkah.

Even after the prohibition against Riba became effective, Al-Abbas’ Ribawi transitions remained in force. It was only during the final sermon did the Prophet cancel these Ribawi transactions.

However, this argument is considered as factually incorrect. It has been counter-argued by some prominent scholars that Al-Abbas did not deal in Riba after he became a Muslim, but of course, dealt with it before.

Mufti Taqi Usmani stated:

“Before embracing Islam he [Al-Abbas] used to advance loans on the basis of interest and his debtors owed him huge amounts. It seems that after the conquest of Makkah he migrated to Madinah and could not settle his transactions with his debtors.

Therefore, when he travelled for Hajj along with Holy Prophet, Sall-Allahu alayhi wa sallam, it was the first occasion when he could settle his transactions, hence, the Holy Prophet, Sall-Allahu alayhi wa sallam, declared that the whole amount of riba payable to his uncle Abbas, Radi-Allahu anhu, was void and no more payable.

The words “first riba” occurring in this declaration do not mean that no riba was declared void before it. What it means is simply that this is the first amount of riba which is being declared as void at that occasion of the last sermon”

Thus, according to Mufti Usmani, the Ribawi transactions Al-Abbas entered into was before he became a Muslim. This point is also made apparent when we look at what the Prophet actually said (admittedly, the translation may be imperfect): “All of the Riba of jahiliyya is annulled. The first Riba that I annul is our Riba, that accruing to ‘Abbas ibn ‘Abd al-Muttalib [the Prophet’s uncle]; it is being cancelled completely”.

When we look at this statement closely, we see that the Prophet is cancelling all Riba transactions (starting with that of Al-Abbas) that occurred during the period of ignorance (in general and of Al-Abbas) – not after the establishment of Islam. This is a critical point.

Anyway, even if we do not agree with this argument – it must be agreed that there is serious scholarly disagreement on this matter, thus we should not use the ‘Al-Abbas’ argument to allow Ribawi transactions between Muslims and Non-Muslims and/or in a non-Muslim country (Dar Al-Harb).

The “Riba is allowed in a Dar Al-Harb” argument has two other dimensions:

[1] It is contended that since the final verses of the Qur’an relating to the prohibition of Riba were revealed after the battles of Taif and Hunayn, the final prohibition of Riba only came into force after these lands entered under the Muslim state through their allegiance and acceptance of Islam. Therefore, Riba was allowed between Dar A-Islam and Dar Al-Harb up until the Dar Al-Harb became Dar Al-Islam (at which point the Riba prohibition came into force). Hence, it is OK to engage in Ribawi transactions even now with countries that are not part of Dar Al-Islam.

This argument is flawed as it is counter-argued by some prominent scholars that since Riba had become an essential constituent of the Arabian society, an immediate order of prohibition right from the start would have created immense social and economic problems – and would have impeded the growth of Islam.

God therefore, adopted a gradual way to eliminate it by starting with discouragement and condemnation of Riba (verse 39 of Surat Ar-Rum) to the final, clear & strong prohibition (verses 275 to 279 of Surat Al-Baqarah).

Mufti Usmani points out that:

“…It was a time when large number of Arab tribes were entering the fold of Islam throughout the peninsula. The practice of riba was rampant among them and it was apprehended that they would continue claiming the amounts of usury from one another [unless a strong & clear prohibition was made]…therefore, the Holy Prophet, Sall-Allahu alayhi wa sallam [during the last sermon], deemed it fit to announce not only the [complete] prohibition of riba but also that all the previous transactions of riba will no more be honored. It was in this context that he declared the amounts of riba payable to his uncle Abbas ibn Abdul Muttalib, Radi-Allahu anhu, as void”.

If we look at the verses prohibiting Al-Khamr for example, they become more forceful as Islam became more established – as newly reverted Muslims may have found it difficult to suddenly give up something they loved so much. The same principle was applied to Riba.

[2] It is also contended that some scholars of the Hanafi school stated that since a Muslim has entered or was living in a non-Muslim country with a promise of interacting safely and with civility, it is then only permissible for him to “…obtain their property by means that they deem lawful….”. Textual constraints would then only allow dealing in Riba, as opposed to selling alcohol or pork for example.

There are 2 problems here. 1) although Muslims can lawfully seize the property of the vanquished, the property has to be that which in itself is allowed for Muslims. Now, if we say that Riba is allowed for Muslims under certain circumstances, then we need to provide the explicit evidence for it. Since there are no such evidence but only indirect inferences made from the primary sources, this becomes a problem 2) as given the choice between explicit evidence (Qur’an and many Sahih Hadiths) in support of the clear universal prohibition of Riba versus indirect, inferred ‘evidence’ for its permissibility in a Dar Al-Harb, the onus is on us to go with the explicit evidence.

Furthermore, there are no real textual constraints that allow dealing in Riba in the scenarios described (if there were, proponents of such arguments would have proffered them by now).

NO RIBA ON COMMERCIAL LOANS ?

There is an argument that commercial loans are not deemed to be loans from an Islamic perspective and that Riba is actually applicable to personal (consumptive) loans only. The argument continues that the definition of a loan according to the Fuqa’ha is charitable, and it is obvious that commercial banks have no charitable intent. Therefore, such loans are beyond the sphere of Riba. The counter-argument against this view is that if we take a look at verse 39 of Surah Al-Rum:

“Whatever you give of Riba bearing loans, so that your amount increases in the wealth of others, does not increase in the sight of God…”

Then, (even if the original Arabic does not have the words “Qard” or “Salaf” in it) we can see from this verse that Riba applied to personal as well as commercial loans. How? well, Makkah was a bustling trading centre and many different types of people came to trade in its markets.

Therefore, it is inconceivable that the Arabs (particularly in Makkah) engaged in only personal loans and did not have the ‘idea’ of lending each other money to enable each other to carry out business transactions.

Hence, it is most likely that the term ‘the wealth of others’ stated by God, is a direct reference to business and trading activities of others because this was how ‘wealth’ was generated in ancient Arabia (high salaried positions were virtually non-existent).

CONCLUSION

The subtle nature of  Riba means that the Interest Riba equation is not a simple subject and the arguments provided above are a brief glimpse into this complex arena – and are not exhaustive (there may be many more areas of research).

However, thus far, one thing has stood the test of time and the various assaults on its foundations and that is no matter how one tries to find faults in the logic of the argument, the fact remains that after everything is said and done – it is evident that modern day Interest is akin to Riba and thus it is forbidden by God Almighty for all of mankind (and Jinns).

© Islamic Finance Today – Pioneer Publications (Pvt) Ltd

Needless to say, Islam envisages a just economic order where all members of society have a fair share in the resources of a nation and are given ample opportunities to seek wealth by lawful means. In fact, wealth is regarded as an amanah or trust from Allah which could be spent one’s needs and for the good of society but should not be misused for frivolous or unproductive ends.

The payment of zakat or the alms tax which the Qur’an enjoins on the wealthier sections of society and which amounts to as much as a fortieth of one’s capital, saved and invested, over a given year, could also be regarded as a means of redistribution of wealth from the wealthier to the less fortunate sections of society. It may also be perceived as a mechanism against the accumulation of wealth, prompting those who possess it to put it to good use in productive undertakings which are likely to create more wealth.
That the Qur’an itself envisages a society in which there is continuous redistribution of wealth is seen in the statement “ What Allah has bestowed on His Prophet (and taken away) from the people of the townships, belongs to Allah, to His Apostle and to the kindred and orphans, the needy and the wayfarer; in order that it may not make a circuit between the wealthy among you” (Qur’an 59:7). Once, when the Prophet was asked by a companion: “Has Allah ordered you to take Zakat from our rich people and distribute it among our poor people ?”. he replied “By Allah, yes” (Bukhari)

The economic world envisioned by Islam is one of free enterprise. The Qur’an expressly permits trading (2:275) and trading is therefore regarded as a legitimate means of earning income. Agricultural and industrial activity are likewise permitted. The ideal economic system conceived by Islam is a vibrant one and this is borne out by numerous passages in the Qur’an. For instance, consider the verse: “Believe in Allah and His Messenger and spend of that whereof He has made you trustees” (57:7). We further find the Qur’an clearly enjoining on the believers to spend of what has been bestowed on them, secretly and openly (13:22) and warning that those who are niggardly are so at the expense of their own souls (47:38).

Thus it could be seen that Islam advocates an economic order where wealth is in constant circulation and that ample opportunities are afforded for wealth creation among all sections of society. As such, accumulation and stagnation of wealth is condemned in clear terms and justly so since wealth which is not put to good use by investing or spending on oneself or on the welfare of others ultimately benefits nobody.

At the same time this does not mean that squandering one’s wealth is allowed for the Qur’an condemns in no uncertain terms spendthrifts as ‘brothers of the devils’ (17:27). What all this shows is that while spending on one’s needs and to meet the needs of others is allowed, wasting one’s monies by indulging in useless or unproductive activities is not. Not only does it deprive one of the opportunity to employ such wealth for one’s own good and that of the larger society, but could also be regarded as a betrayal of the trust which God has vested in such an individual.

We will here deal with a few financial sins in Islam that ought to be avoided at any cost.

Usury

Usury or the taking of interest on a loaned sum is a great sin in Islam and is condemned in the Qur’an in no uncertain terms. Thus those who do not give it up are warned in the Holy Book (2:279) to take “notice of war from God and His Messenger”. They are however told: “If you repent you shall have your capital sum. Deal not unjustly and you shall not be dealt with unjustly”.

We are also told of the dangers of usury in very telling terms in 2:275-276: “Those who take usury shall rise up before Allah like men whom Satan has demented by his touch; for they claim that usury is like trading. But Allah has permitted trading and forbidden usury. He that receives an admonition from his Lord and mends his ways, may keep what he has already earned; his fate is in the Hands of Allah. But he that pays no heed shall be among the people of the Fire and shall remain in it. Allah has laid His curse on usury and blessed almsgiving with increase. He bears no love for the ungrateful sinner”.

In the Sunnah or Prophetic tradition which supplements the Qur’an as a source of Islamic jurisprudence, we find the Prophet (Upon Whom Be Peace) elaborating on this prohibition to the extent of categorizing those who receive, pay, record and witness interest payments as all alike. Jabir has reported that the Prophet cursed “the one who consumes riba, the one who gives it to others, the one who writes it down and the one who witnesses it. They are all the same”. (Sahih Muslim).

Now we may ask Why did Islam prohibit interest ? The answer is not a difficult one, for when we consider the ill-effects of interest on human society, we can only agree with the Divine Wisdom behind its prohibition. Needless to say, interest is ethically and morally wrong. It leads to a situation where the one possessed of wealth, instead of working and putting his monies into productive use by his own mental or physical exertion, chooses to live a life without labour, drawing on the efforts of others to increase his wealth, or to put it more metaphorically “suck the blood” of his less fortunate fellows.

It could thus be seen that dependence on interest discourages holders of wealth from exerting themselves or engaging themselves in some productive venture to earn money. Rather what they choose to do is to place this ‘burden’, so to say, on others and let them persevere and bear the risks all by themselves. These moneylenders could simply rest contented, knowing very well that the borrower would have to pay them the capital lent,  plus a substantial additional amount that increases over times euphemistically known as ‘interest’ whatever the outcome of the money lent, whether profit or loss. It is this element of a guaranteed payment without taking onto oneself the associated risks that militates against economic fairplay.

One must also bear in mind that those who seek monies from others usually do so for a good reason, such as to meet the basic needs of themselves or their families, or if they have reached a higher level of subsistence, for some productive venture that could contribute to the good of society as a whole. As such, demanding for a payment on top of the capital lent could be said to lack goodwill, but rather be regarded as a tool for exploitation. This is all the more so if the borrower is needy and he is borrowing either to meet his needs or to uplift himself. To put a further burden on him by stipulating that he repay his loan with an additional amount is grossly unjust to say the least. To add to this exploitative nature of interest must be mentioned its cumulative effect over time. In other words, it amounts to selling time which is God’s alone.

As such, interest could be regarded as an oppressive tool that seeks to make the rich richer at the expense of the poor, in the process increasing the gap between the haves and the have-nots. Not only will such a situation lead to greater poverty, but could also breed contempt and hatred towards the rich by the less fortunate sections of society, resulting in considerable social conflict that could eventually take a violent turn and harm society as a whole.

From an economic viewpoint too interest does not measure up as a productive economic agent, but rather yields significant negative consequences since it simply seeks to make money with money, giving nothing in return, unlike when money is out to good use in trading and manufacturing activities, thereby realizing through the input of labour, products of real economic value.

Recent economic studies have also shown how interest contributes to continuous inflation unlike seasonal inflation that depends on the scarcity of goods at given times, since borrowers who have borrowed on interest would have to adjust their accounting books for increased liability resulting in increased prices of saleable assets, whether goods or services. In an economy running on this basis, prices will increase with each cycle of lending thereby leading to a continuous trend of increase in prices which in turn reduces the purchasing power of people. Needless to say, it is mostly the poor and needy who are affected by rising prices, showing again the great harm that interest afflicts on society.

The solution therefore lies in the possessors of wealth coming in as real economic players, investing their monies in viable and Islamically permissible ventures and as partners providing capital to such ventures while at the same time taking the risks involved, a solution which is an equitable one to all concerned. The task has very much been simplified today since Islamic financial institutions have come in as intermediaries, mobilizing funds from depositors for investing and distributing the dividend on a profit and loss-sharing basis to the satisfaction of all concerned.

Theft

Theft is a very serious offence in Islam and harsh punishments prescribed for it. Theft is an extremely offensive financial crime as it deprives another of his rightful possessions which are very often earned by hard labour. The thief on the other hand seeks to thrive on another’s misery by depriving one of one’s property merely by stealthily removing it and taking it under his possession and later often disposing it for a trifling price.  Thus a thief is one who thrives at the expense of another. The victim is often left helpless by this inconsiderate act as he would not know where to look to for recovering his property.

Theft also has other implications. For instance, it affects the mentality of the victim and one can only imagine the mental trauma a victim of theft undergoes, especially if the item he has been so unfairly deprived of  has value (such as sentimental value) or is of great necessity (such as for one’s education or medical treatment) to that particular person. Moreover, theft creates suspicion which has to be shunned at all costs, but which nevertheless cannot be easily erased from one’s mind when one has been subjected to such a malicious act. Needless to say, suspicion creates considerable unpleasantness in society and tends to harm its moral fabric.

Says the Qur’an (5:38): “Cut off the hands of the thief, male or female, as a recompense for that which they committed, a punishment by way of example from Allah. And Allah is All-Powerful, All-Wise”.

It is however established in the Sunnah that only the right hand from the wrist joint would be removed for the first offence, the left foot for the second, the left hand for the third and the right foot for the fourth. It is no doubt a harsh punishment, but one that is also necessary given the seriousness of the offence. The severity of the punishment is evident from the fact that the one so punished undergoes not only the pain of the punishment, but also the handicap it inevitable leads to and the social stigma that he or she may have to subsequently endure given the irreversibility of the amputation. As such, it is an extremely strong deterrent for real and potential thieves. Indeed, the very fact that the Qur’an prescribes such a harsh punishment for the crime is in itself a psychological deterrent to any Muslim who – God forbid- may think of committing theft, even in societies that do not actually implement the punishment. Little wonder then that theft is hardly known in Islamic societies.

As always, Islam is very considerate when prescribing such punishments. Thus a minor, insane or sleeping (sleepwalking) person cannot be subjected to the punishment, nor can it be applied in a time of famine or war. The intention of stealing should also be clearly established. The item stolen must also have a significant value, which is to say that it should be worth over three silver dirhams, in other words the equivalent of 1.6 grammes of gold which in today’s context would be an item worth over USD 40 or its equivalent in other currencies.

Further, the stolen item should have been removed from the safe custody of its owner, which is to say a place which is meant for safeguarding it such as a safe or cupboard in the protection of one’s home. For instance, a cupboard is an appropriate place to keep jewellery while an enclosure is an appropriate place to keep livestock. Thus one who steals jewellery left unprotected in a public place or an animal straying out of its pen cannot be subjected to the punishment. Thus it could be seen that the punishment of amputation would only be applicable when the owner of the item has taken every possible step to protect his property and is not guilty of its negligence by leaving it in an area that is easily accessible to the public. By extension, those who share a common residence thereby having access to an item of value such as family members whether they be one’s child or spouse or even a servant or guest will not be liable to the punishment.

Furthermore, the theft should have been committed by stealth when no one was around. As such, thefts in public places in broad daylight even when no one is looking around will not incur the punishment. Nor will appropriating an item by force, except in cases of armed robbery in which case the perpetrator will be treated as a rebel and subjected to cross amputation (Amputation of the right hand and left foot which is prescribed in the Qur’an for such criminals). Although this might strike one as surprising, the fact is that the one who seizes an item forcibly could be identified and the item recovered either by enlisting the help of others in the vicinity or by resorting to the strong arm of the law. The point here is that the perpetrator can be identified and the goods recovered without much difficulty unlike in the case of a thief who steals by stealth and whose identity remains unknown.

In addition, to prove the theft, two witnesses are required, though a confession from the thief would suffice. Even at this stage, the victim could pardon the thief by gifting the stolen item to him or her before he or she is taken to the judge or legal authorities for redress.

However, this does not mean that thieves who don’t meet the criteria for the application of the prescribed punishment such as petty thieves, pickpockets or shoplifters should be allowed to get away. They could be punished by discretionary punishment known as ta’zir at the instance of the courts which usually takes the form of corporal punishment which could serve as a deterrent for the commission of any more offences of this nature.

Fraud

Fraud or the act of deceiving people in business dealings is a great sin in Islam. Such fraud can take various forms such as cheating in weighing to selling inferior goods by passing them off as superior quality by concealing its defects to more complex transactions involving embezzlement or depriving others of their property by unlawful means. Unlike the thief, however, the fraudster is usually known, so that action such as litigation could be taken against him to restore the property in question. Thus there is no prescribed punishment for fraud, though the courts are free to mete out justice to the culprit by application of ta’zir which could take the form of imprisonment.

The Qur’an (133: 1-6) delivers a severe warning to those engaged in fraud in the following verses: “Woe to those that deal in fraud, – those who, when they have to receive by measure from men, exact full measure, but when they have to give by measure or weight to men, give less than due. Do they not think that they will be called to account- on a Mighty Day when (all) mankind will stand before the Lord of the Worlds.”

The Prophet (Peace Be Upon Him) is  known to have declared:” The signs of a hypocrite are three: when he speaks, he lies, when he promises, he, breaks his promise; and when he is entrusted, he betrays the trust” (Bukhari) He is also known to have condemned those who deceived in very strong terms. The Prophet once came upon a heap of corn in the market of Medina and thrust his hand into it whereupon his fingers felt some dampness. Upon being questioned about it, the trader replied that rain had fallen upon it. The Prophet then observed “Why did you not then keep (the wet portion of) it above the dry corn, so that people could see it? He who deceives, is not one of us” (Sahih Muslim).

This hadith clearly implies that those who engage in fraud and deceit are not true believers as they have no consideration for their fellow humans or brother Muslims.  Honesty after all is a trait of every true believer in Islam.

Another very serious offence is the usurpation of another’s property by force or fraud or by means of dishonest litigation.

Says the Qur’an (4:29): “Oh ye who believe! Eat not up each other’s property by unfair and dishonest means.”

We also have the Prophet declaring that: “He who acquires the property of a Muslim unjustly by taking a false oath, Allah has made the Hell his abode and forbidden him Paradise” On hearing it a Companion is reported to have asked “Even if it is an insignificant thing ?” The Prophet replied, “ Even if it be a twig of arak (a plant from which sticks for cleaning the teeth are made)” (Muslim)

Bribery

Bribery is the act of paying one a consideration with a view to influencing his actions in the discharge of a public or legal duty in a manner that is inconsistent with his duties or in breach of the law. In other words, it may be defined as a payment made to an official that prevents him from doing that which he is obliged to do in the normal course of his duties or alternately a payment made in exchange for not performing an action which one is obliged to perform.

Although bribery has become a common practice today in all or most parts of the world, in some places even reaching epidemic proportions, it must be borne in mind that it is strictly prohibited in Islam. The Prophet is known to have declared: “Allah cursed the briber and the bribe-taker” (Abu Dawud, Tirmidhi and Ibn Majah) while Tawbah has narrated “The Messenger of Allah (Peace Be Upon Him) cursed the briber, bribe-taker and the mediator meaning the one who walks between the two”.

What becomes clear from these ahadith is that bribery is forbidden as a general rule, regardless of whether it is meant for a good or evil purpose, that is in seeking a right or seeking something that is wrong. Although this might strike one as unreasonable, what must always be borne in mind is that one’s gain might be another’s loss. Consider for example the case of one bribing a government official to get some administrative matters sorted out sooner. This could well be to the detriment of another who has made an application earlier. Similarly, when one bribes a policeman to hide some facts detrimental to oneself or one’s aides, it would infringe on the rights of the victim to seek redress and when one bribes a judge to give a favourable judgement it is certainly bound to impact on the rights of one’s adversary to get a fair hearing.
There are however those who opine that bribes given to take back what rightfully belongs to oneself or to undo an injustice, which could not be accomplished by any other means, are permissible. This is however only an opinion and it is best to avoid bribery at any cost and instead have patience which is bound to have its reward from the Almighty.

Hoarding

Stocking of goods in order to increase their prices in times of scarcity is a serious offence in Islam and severely condemned. It has been the practice since ages past for unscrupulous individuals such as food producers and traders to withhold releasing their goods into the open market where they could be purchased at fair market rates with a view to creating an artificial scarcity that could drive prices upwards and bring them better returns.

Thus it is evident that it is the hoarding itself which results in the non-availability in the market of goods and the concomitant increase in the prices of such goods. Such artificial manipulation of prices goes against the public interest. Not only does such an action lead to severe shortages of goods, including essential goods, thus causing the public great hardship, but also seeks to deprive the public of the true value for their money, in other words, theft in another form. The Prophet clearly included the hoarders in the category of misled elements when he declared “No one hoards but one who is in error” (Muslim). On another occasion, he declared: “If anyone withholds grain for forty days out of a desire of high price Allah will renounce him” (Ahmad) and on another: “He who brings goods to the market is blessed with bounty, but he who withholds them is cursed” (Ibn Majah)

Gambling

Gambling or speculation which is known as gharar is strictly prohibited in Islam. The Qur’an (5:90-94) calls gambling “an abomination of Satan’s handiwork” and urges the believers to avoid it that they may be successful. It adds that Satan by this means desires to sow enmity and hatred amongst the believers and hinder them from the remembrance of Allah and from prayer. This statement of the Qur’an warns us why we should desist from gambling. For one thing, gambling causes enmity between men, since it is always a zero-sum game with a winner and a loser. Although the winner gets away with a fortune, he does so at the expense of the loser who would not only be frustrated that he had lost the game but also regret that he had played the game in the first place. Such anger could lead to enmity between these men.

For another, games of chance tend to be compulsive, not only prompting the losers to try their hand again in regaining their lost monies and the winners to yearn for more impelled by the greed that goes with it, but also leads to the neglect of one’s obligations to the Creator such as the prayer.

Gambling also has other ill-effects. It makes one dependent on chance or ‘luck’ thus diverting him from engaging in honest and productive labour to earn a living. It does not lead to wealth creation, but rather to a transfer of wealth from one party to another to the total detriment of the affected party. Besides gamblers in their pursuit of ‘luck’ tend to neglect their duties to society and to their families. The toll of such gambling on human society can be painful, particularly where families with a sole breadwinner are concerned.

Gambling can take many forms. This includes playing at casinos, taking part in lotteries or betting on horses or games, all of which contain an element of risk and speculation.

However, speculation can also take other forms. For instance entering into transactions where there is no guarantee that the seller could deliver the goods in good condition to the buyer who makes a payment in consideration of it. Thus buying fish in the sea, or livestock while in the womb or fruits in a tree while yet unripe all belong to this prohibited category. The rationale here is that there is an element of uncertainty as to the outcome of such transactions. For instance, a blight or some natural disaster could affect the crop, thereby leading to a great loss for the buyer. It could also cause quarrels between the buyer and seller even to the extent of leading to litigation, thereby sowing the seeds of discord in society.

Miserliness

Miserliness or the act of hoarding wealth out of a desire of keeping it for oneself without any purpose is deemed a sin in Islam. The Qu’ran repeatedly enjoins the believers to spend of what they have been bestowed with, as for example in the verse “Believe in Allah and His Messenger and spend of that whereof He has made you trustees” (57:7). We also find the Qur’an clearly instructing the believers to spend of what has been bestowed on them, secretly and openly (13:22) and warning that those who are niggardly are so at the expense of their own souls (47:38).

More telling however is the following verse of the Qur’an which warns of a severe Divine punishment for those who hoard: “Those who hoard up gold and silver and spend it not in the way of Allah, unto them give tidings of a painful doom. On the day when it will be heated in the fire of hell, and their foreheads and their flanks and their backs will be branded therewith (and it will be said unto them) “Here is that which ye hoarded for yourselves. Now taste of what ye used to hoard” (9:34-35). In the olden days such as when these verses were revealed, gold and silver constituted standard currency or in other words, money, which was used as a medium of exchange. In today’s context, paper money serves the same purpose and it is evident that hoarding any form of currency, be it gold, silver or paper money, is strictly prohibited in Islam.

Here, however, a clear distinction has to be drawn between saving and hoarding wealth. While hoarding wealth means accumulating money for no purpose but greed, savings comprises money saved for a purpose such as for constructing a house or setting up a business. Thus unlike hoarding where money is prevented from entering the market and contributing to economic development, savings are monies that are intended to be spent at a later date at an appropriate time, thereby ensuring its entry into the market with a definite goal and purpose, which needless to say, could contribute to an economy in a significant manner.

Squandering

Islam does not condone extravagance, for all resources have to be employed for meeting one’s needs and for the good of one’s family and welfare of the community at large. Wasting one’s monies by indulging in useless or unproductive activities is therefore deemed a sin in Islam, so much so indeed that the Qur’an calls spendthrifts ‘brothers of the devils’ (17:27). The Holy Book further addresses man as follows: “Eat and drink, but waste not by excess, for Allah loves not the prodigals” (7:31). Not only does squandering one’s wealth deprive one of the opportunity to employ such wealth for one’s own good and that of the larger society, but could also be regarded as a betrayal of the trust which God has vested in such an individual.

Willful default

Islam does not condone one being in debt for too long, for this would naturally affect his relationship with the creditor who had been kind enough to give him a loan. A debtor may also be tempted to resort to lies in order to explain why he has not been able to repay his debt and even to break the promises he gives. Debts should therefore be settled as soon as one is able to repay them. The Prophet is reported to have said: “The best among you are those best in paying off debt” (Muslim) and “Procrastination in repaying debts by a wealthy person is injustice” (Bukhari). Another hadith tells us: “Whoever contracts a debt intending to repay it, Allah will repay it on his behalf, and whoever contracts a debt intending to waste it, Allah will bring him to ruin” (Bukhari).

Indeed, according to Islam, the debt is a ransom by which the soul of a believer is held hostage once he departs from this world, for the Prophet stated in no uncertain terms that “The soul of the believer is held hostage by his debt in his grave until it is paid off” (Tirmidhi). What this hadith suggests is that a debtor would be in a state of limbo until such time the debt is settled by his offspring. The Prophet is also reported to have said: “Whoever dies free from three things –arrogance, cheating and debt- will enter paradise” (Tirmidhi), thus demonstrating how important the settling of one’s debts is considered in Islam.

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