That evening in the HSBC conference room, our modern-day scholar, Sheikh Nizam Yaquby, turned his attention to the basic types of contract allowable in Islamic commercial law. Contracts are categorized according to their purpose: contracts of exchange such as a simple sale and purchase agreement, or a lease contract; contracts of investment to permit profit for partners in a venture, which may involve the investment of either capital or labour; contracts of charity such as donations or interest-free loans, such contracts entered into for the sake of pleasing Allah, and which have no conditions attached, being a unilateral transfer of wealth; contracts of security that create rights over an asset, such as a mortgage over a property or a guarantee of a debt; and agency and trust contracts that fall into a miscellaneous category. And finally the scholar turned to what was probably the most significant point he would make that evening: the prohibitions. These are the fundamental things you cannot do in Islamic commercial and financial transactions. Of course, these prohibitions are a component of the full body of knowledge and, in and of themselves, do not adequately complete the study of jurisprudence related to transactions without a reading of the conditions for the legal existence of a contract to make it valid, executed, concluded and binding. With regard to these restrictions the sheikh referred us to the Quran: “Those who take usury will not stand on the Day of Judgement except as he who has been driven mad by the touch of the Devil. That is because they have said ‘trading is like riba’, but Allah has permitted trading and prohibited riba. Whosoever receives an advice from his Lord and stops, he is allowed what has passed, and his matter is up to Allah. And the ones who revert back are the people of the Hellfire. There they remain forever. Oh you who believe, fear Allah and give up what remains due to you from riba if you are truly believers. And if you do not, then take notice of war from Allah and His Messenger, but if you repent you shall have your capital sums. Deal not unjustly and you shall not be dealt with unjustly.” We discussed earlier that Islam considered the earning of money upon money, or riba – commonly translated as usury or interest – as being unjust. The Quranic verses above, revealed at a time when a tribe pledging allegiance to the Prophet proposed to retain their rights to pre-existing usurious contracts as a condition to accepting Islam, state a clear prohibition against the practice. However, it is to the practice of the Prophet, and the study performed by scholars, that we must turn in order to understand the practical implications of this prohibition. It is interesting that given such a severe injunction against riba both at this point in the Quran, and elsewhere in the Quran and Hadith, that Muslims today persist in the giving and taking of riba. Indeed, in many Muslim communities throughout the world, the banking profession is accorded the same respect and prestige, perhaps more so, than in the non-Muslim West. Pakistan, for example, has produced many exceptional bankers who have excelled in the world’s leading financial services institutions, and yet within Pakistan itself the Shariah Appellate Bench of the Supreme Court – presided over by none other than Mufti Taqi Usmani – issued an historic judgement on interest in 1999 declaring interest in all its forms as being equivalent to riba as outlawed in the Quran, and setting forth a legislative approach to eradicate interest in the country. So entrenched are many Muslims in the modern economic system that they either do not recognize the severity of the transgression in their religion, or assume that necessity dictates its use since there is no viable alternative. To the non-Muslim observer, this dichotomy is perplexing given the severity of punishment accorded to the one who participates in riba. It is considered one of the seven most heinous crimes, a group that includes the crimes of murder or believing in gods other than Allah. At least six collections of books from the Hadith state that Muhammad has cursed the receiver and payer of riba, the one who records it, and the two witnesses to the transaction, saying: ‘They are all alike [in guilt].’So even the accountant and the lawyer documenting the transaction are guilty, and considered to be at war with Allah. So why do Muslims do it? What justification do they find for taking conventional mortgages on their residential properties? Or corporate loans to grow their businesses? For working in the banking industry or as accountants or finance lawyers, auditing and documenting interest-bearing loans? In the famous 1999 judgement at the Supreme Court of Pakistan, the four judges of the Shariah Appellate Bench analysed some common misconceptions about riba. The most common defence for the use of interest is the doctrine of necessity. How else can I buy a home or a car? How does a nation fund itself within a global economy? Some appellants (many being representatives of domestic financial institutions) argued that the interest-based economy has become a universal necessity and that no country could live without it. To outlaw its usage would be a suicidal act for Pakistan, shattering its economy, and therefore should not be declared as repugnant to Islam. They argued that once the prohibition of interest is enforced, development projects would breathe their last and the economy would face sudden collapse. Mufti Taqi’s response was measured. He conceded that Sharia was pragmatic enough not to bind an individual or a state to something beyond its control, and indeed the doctrine of necessity is a doctrine enshrined in the Quran and the Sunnah of the Prophet. A case in which the doctrine may be called upon is the concession that one may eat pork – prohibited for consumption in Islam – in case of extreme hunger to save one’s life, and indeed this was an example cited by one of the appellants to the case. However, the magnitude of necessity is a key determinant in the allowable usage of this doctrine. As Mufti Taqi wrote, before deciding on the basis of necessity, ‘one must make sure the necessity is real and not exaggerated by imaginary apprehensions and that the necessity cannot be met by any other means than committing an impermissible act’.In other words, if you have a halal – or permissible – alternative, take it. So do we have a halal alternative? According to the eminent scholar and his fellow judges, they believed the threat of economic collapse was exaggerated. For domestic transactions, they proposed a banking system based on the concept of profit-and-loss sharing, and other Islamic modes of financing, though they recognized the immaturity of the Islamic finance industry and therefore the effort that would be required to implement this alternative banking system. They also recognized the necessary role that the government must take in ensuring a level playing field for Islamic financial institutions, perhaps tacitly acknowledging the failure of President Zia ul-Haq’s crude attempt to Islamize the economy two decades earlier (recall my cousin cycling through the streets of Karachi to withdraw the family savings). Without the appropriate legislative framework in place, such institutions would always be at a disadvantage to their conventional counterparts, unless of course the domestic government outlawed conventional banking in its entirety. Beyond the argument defending the doctrine of necessity, other champions of conventional financial services have posited alternative arguments in favour of the acceptability of interest in Islam, though these too were refuted by the scholars of the Supreme Court. One argument in favour of interest contended that the verses of the Quran that prohibit riba were revealed in the last days of the life of the Prophet. Consequently, he did not have an opportunity to interpret and implement them properly, and that therefore the term riba remains ambiguous in nature. The scholars responded by pointing out that the earliest revelation relating to the express prohibition on riba took place in the second year following the Prophet’s migration to the city of Yathrib, subsequently known as Madinah. Earlier verses had been revealed in the Makkan period of Islam condemning the practice though without explicit injunctions. In short, there was ample time in which to digest the impermissibility of riba.Subsequent verses and Hadith backed up the earliest recorded evidence of a ban. Another argument put forward was that the word riba refers only to the usurious loans on which an excessive rate of interest was charged by lenders, such a rate deemed exploitative. Christians over the centuries had engaged in similar discussions, with the Church gradually relenting until, by 1917, even the Catholic Church allowed itself to invest in interest-bearing securities. According to this argument, modern banking does not charge an excessive or exploitative rate, and bank interest cannot fall within the definition of riba. Proponents of this argument contended that the first Quranic verse to ban riba is qualified by a specific amount of usury: ‘Oh you who believe, devour not usury, doubled and multiplied; but fear Allah that you may (really) prosper.’Does this mean that interest is classified as riba if the principal repayable is double the original amount? Not so, said the scholars.12 An examination of the different verses should readily reveal that the reference to ‘doubled and multiplied’ is an idiom that is not meant to be taken as a restrictive qualification, but applies to all loans where an increase of money against principal takes place. The Quran bans riba on consumption loans and not commercial loans, said the bankers. They contended: surely riba refers to the increased amount charged on consumption loans as taken by the poor of the Prophet’s time for their day-to-day needs? Surely the ban is intended as humanitarian support for the oppressed, to avoid exploitation of the weak by the strong? Commercial loans were not prevalent 1,400 years ago, and the Quran has not explicitly addressed them. Today the debtors of these commercial loans are not the poor, they are well-funded and healthy corporations requiring little in the way of humanitarian protection. The scholars responded that the ban is an absolute ban, without distinction on the type of borrower.Furthermore, the contention that interest cannot be an injustice against the rich or against powerful corporations assumes firstly that money can be treated as a commodity (which it cannot, as noted earlier), and that it has no adverse effects on production and distribution in an economy. Today, even conventional commentators might suggest that leverage is harmful to individuals, corporations and countries alike, and so this argument was refuted by the scholars. Finally, the advocates of an interest-based economy argued that only a specific category of riba, known as riba al-jahiliyyah, was banned, a practice of the pre-Islamic period whereby a loan was advanced for a given period of time with no interest charged. If at maturity the capital was not repaid, then the loan would roll over and interest would be charged to it. According to the defenders of modern interest, if an increased amount is stipulated in the initial agreement of the loan, then it does not meet the Quranic definition of riba. It would, however, meet the definition of another category of riba, riba al-fadl, prohibited by the Sunnah, and thus a prohibition of a lesser degree and considered harmful rather than impermissible. Once again, the scholars argued against this on the basis that the definition of riba al-fadl covers the transactions of sale only (and not loans), and the ban on riba does not specify any such exception anywhere in the Quran or Sunnah.The Supreme Court judgement was radical, though its implementation over the years has remained sketchy at best. Despite this, the text of the judgement is a case study for Muslim governments around the world.

Heaven’s Bankers: Inside the Hidden World of Islamic Finance Book by Harris Irfan