P L d 2000 s c 225 (Riba prohibition stayed)

 

 

 

Another practical consideration advanced for retention of interest relates to meeting the costs of banking and making it a worthwhile vocation. This again would have been a persuasive consideration provided it were accompanied by compelling evidence that no substitute of interest, shorn of its depredation, can be devised. Actually, we have not even seriously started on our quest in this direction, making the argument patently premature. But suppose after making the necessary effort we do not find a workable alternative to interest, it would be a good argument for retention of interest, but not for the reason of its assumed benevolence as contrasted with usury, but for the reason that an unexploitative basis of credit, in spite of all conceivable efforts, had eluded our grasp. Similarly, capital depletion as justification of interest has no valid basis because interest is a payment for financial capital and not for physical capital. All theories of interest are mere quibbling and all positive qualities attributed to this institution including the fairy tale of its differentiation from usury mere balderdash. According to Prof. Mahmud Ahmad, in spite of these convincing arguments, interest exists because no equally workable alternative basis of banking has yet been devised. After raising the question, how far this persuasive argument is withheld for the fear of focusing of attention of all creative thought on the devising of an unexploitative credit structure, he thinks it is something best left to the reader to decide.

 

 

 

What Professor Shaikh Mahmud Ahmad has said about bank interest applies to the problem of bank reserve. There is no mention of its restrictive role which we are forced to suffer because of the absence of an alternative which may be able to perform its positive functions. This issue hitherto has not deserved even a mention by our economics. Interest is in reality only monopoly price charged by capital. Its rise and fall has no relevance to the fine-woven difference between interest and usury, but merely with the limit of what the traffic will bear. Bank reserve plays a double role in enabling perpetuation of this monopoly price. On the one side, it represents collusion between wealth owners which is an essential ingredient of monopoly, and, on the other, t ensures restrictive supply of capital resources in order to confer on them eligibility of demanding a price for their utilization. Interest in short is an exploitative category completely indistinguishable from what was called usury a few centuries back.

 

 

 

The question of interest is closely related with the concept of money which occupies an important place in any discussion on financial, fiscal and monetary reform. It is generally claimed by the western writers on the subject that money was introduced much later at a certain stage of evolution. Before that stage, it is asserted, that exchange and transfer of commodities was done on the basis of barter which signified direct exchange of goods and service. But there being no historical evidence to substantiate this claim, it seems to be based on mere conjecture. It appears from a Hadith that the concept of money is as old as human dealings and transactions are. The Prophet of Islam is reported to have said that Allah has created gold and silver to be the natural money. It shows these two metals have been designed to serve as medium of exchange, measure of value and storing the wealth and easy mode of deferred payments. But it does not mean that in primitive societies barter exchange had not been common. Rather, it is still practised at many places particularly in the remote areas of under-developed countries. The Shariah has taken cognizance of both monetary exchange and barter exchange and has laid down principles to regulate both kinds of transactions and dealings. The law of Riba takes care of both the kinds of economies. While Riba al-Nasi `ah primarily seeks to eliminate interest from monetary economy where goods buy money and money buys goods, the t prohibition of Riba al-Fadl seeks elimination of interest from barter, economy where goods buy goods. Although barter economy is rapidly shrinking at domestic level, it exists at international level and may continue for sometime in future as well. It is not, therefore, safe or advisable to brush it aside as something bygone and outdated. The traditional difficulties and demerits of a barter economy as enumerated by the writers on monetary theories apart, the relevance of Islamic precepts about the prohibition of Riba al-Fadl remains to have a permanent relevance. Muslim Jurists and economic thinkers seem to have been aware of difficulties faced in a barter system. It was perhaps to overcome the problem of the lack of double coincidence of wants that they tried to identify certain commodities as quasi-money. The discussions made by Muslim jurists for the identification of the Illah and the determination of ratio decidendi clearly indicate their desire to develop quasi-monetary commodities. According to Iman Malik, for example, the ratio decidendi of the prohibition of the six well known commodities is the storability and facility to make deferred payments. According to Imam Abu Hanifah, it is the common measurement and fungibility of these commodities which is the Illah of their prohibition.

 

 

 

The upshot of this discussion is that Islam acknowledges not only the real money, namely gold and silver or anything which may represent them, but also takes into consideration the barter practices and quasi-money if it meets the requirement of measurement and storage of value and usability for making deferred payments.

 

 

 

The Hadith that gold and silver constitute the real and natural money is very significant. It docs not appear to be a mere statement of a historical fact. It seems to he a reaffirmation of the universal economic principle that there has been and has to be a common, universally acknowledged and easily manageable medium of exchange which is nothing but gold and silver, whether in the form of bullion or coin or any promissory or banknote which should be supported by a corresponding quantity of gold. Historical records show that gold coins were in use even in the ancient-most societies ever found on the surface of the globe. There has hardly been any excavation of ancient human dwelling where the traces of gold coinage have not been found. The introduction of paper money did create some problems for Muslim jurists of the eighteenth and nineteenth centuries who faced some difficulties in understanding the true nature of paper money and, accordingly, different points of view were advanced by the jurists in their effort to formulate Islamic positions regarding paper money according to their respective understandings and perceptions. The nature and dimensions of paper currency has undergone such quick changes that Muslim jurists had to keep pace with the changing positions of the western bankers and fiscal experts. The different and apparently conflicting views of Muslim jurists are to be explained and interpreted in the light of the changes in the nature and attendant features and functions of paper money in leading western economies, particularly in Britain, France and other colonial powers. In 19th Century most Muslim jurists tried to explain paper money in terms of Islamic categories of Kafalah, Hawalah and other similar instruments. But these traditional instruments were never meant to be used as paper money. They were simply designed to serve as means of transferring debt or other obligations from one person to another. Their nature was not different from a cheque which facilitates transaction between two specific parties and expires after a single transaction. Like a cheque, a Hawalah instrument was not money; it was simply a written order or undertaking to transfer or accept money or obligation. This important background must always be kept in view while considering the writings of Muslim Scholars and Ulema about paper money as introduced by western powers in the Muslim World.

 

 

 

As far as the kinds of money are concerned, the Shariah position is very clear. The metallic money made of gold and silver is the real and the natural money and is subject to all the rules and principles laid down in the Shariah to regulate its transaction, transfer, use, investment and all other forms of disposal. Money made of other metals such as nickel, copper and steel, is to be taken as money as long as it is considered a legal tender. This kind of money was normally classified as lulus and Muslim Scholars have dealt with it in detail. We will come to it later.

 

 

 

The standard money or full bodied money was in vogue during the days of the Prophet of Islam and continued to be in use for quite sometime after him. In fact during his days and the days of his immediate successors the gold and silver coins which were in circulation in Arabia and elsewhere were standard money and their value for non-monetary purposes was exactly the same as their value as money. The fulus made mostly of copper or nickel represented only the token money as their intrinsic value as a metal was definitely muchless than the face value they carried. But one thing is very significant in respect of fulus which should always be kept in mind. The fulus were used mostly, if not exclusively, as units of gold or silver coins. The number of fulus included in a particular silver or gold coin varied from time to time as a result of the interplay of market and other forces and the value of one Fals fluctuated without affecting the value of the parent coin of gold or silver whose value underwent little change and that too very rarely. In a way the fulus were subsidiary money in their, relation to the standard money. The Fiqh literature has extensively dealt with these kinds of money in the context of commercial contracts, trade operations and business transactions.

 

 

 

The paper money, being something comparatively, new, found little mention in the standard works on Fiqh produced even as late as the seventeenth or eighteenth centuries. Most of the Muslim scholars and Ulema had an encounter with paper money when it was not a fully representative paper money and was, in fact and in effect, a kind of receipt issued from the circulating agency for full-bodied coins or their equivalent amount of gold or silver in bullion. As such Muslim Scholars and Ulema in the beginning did not consider paper money to be real money and treated it only the way a receipt is treated. Later, when the representative paper money degenerated into convertible and then non-convertible paper money, Muslim Scholars started reviewing their earlier positions. There have been different views and opinions about the Islamic position vis-a-vis fiduciary money or the fiat money. But the consensus which appears now to have been made is that the fiat money is money for all practical purposes and will have to be taken as a substitute for gold and silver, the real and natural money. There is no difficulty as far as the legal status of fiat money is concerned. However, the difficulty arises when it is asserted, to quote J.M. Keyens, that the fiat money has no fixed value in terms of an objective standard. Again, the distinction made by Keyens between what he calls the money of account and the money proper has to be dealt with carefully in order to formate Islamic positions vis-a-vis the same. According to him, money of account is represented by debts, prices and the general purchasing power. In fact, it is the general purchasing power which now seems to be occupying the field rapidly and is perhaps driving out other forms of money to the corner. The concept of SDR is nothing but a money of account which is now controlling most of the international transactions. However, it is too early and premature to express any definite ruling or final verdict on the Islamic position about the money-of-account as a whole and different kinds of this money will have to be taken separately. Some of them will continue to be dealt with under the law of Hawalah and Kafalah. Some other kinds may be taken to be the substitute for real money, namely gold and silver, in so far as their use as medium of exchange and unit of value is concerned. Some other forms of money-of-account e.g., SDRs will have to be equated with fiat money in so far as the application of law of Riba is concerned. The question of negotiable instruments is closely related to, if not all together dependent on, the formulation of Islamic position about the money-of-account and near money. The non-legal-tender money or optional money is, in fact, a very grey area where one hard and fast rule cannot be applied. However, if the bonds, securities, debentures, treasury bills which have a ready market and are negotiable and easily convertible into real money within a short time, these should be treated like a substitute of the fiat money and should be subject to those very limitations and restrictions which control the fiat and the real money. However, such other types of the money-of-account which have no ready market and not easily negotiable and convertible into real money shall continue to be treated like personal instruments and Sukuk.

 

 

 

The question of currency and coins has also occupied a significant position in the discussion on Islamic solution to inflation and the possible role of indexation as well. Before we embark upon a treatment of Islamic position about indexation it is necessary that the status and legal position of coins and currency in Islam is determined. This is necessary because some people confuse the modern concept of legal tender and flat money with the coins or lulus used in the early centuries of Islam as smaller units of dirhams and dinars. In the early days of Islam fungible items, particularly dates, wheat, barley, hides and such other similar commodities were used “, as medium of exchange in addition to gold and silver coins. It appears from the Qur’an that the gold, silver and other coins were used in very ancient societies. In the context of the people of the cave the Qur’an tells us that they had carried with them silver coins (wariq) for the hour of need. They sent one of their colleagues with these coins to the town to purchase food  for them (al-Qur’an, al-Kahf: 18). Similarly in the context of Prophet Yusuf there is a mention of dirhams paid by the Egyptian caravan for the purchase of young Yusuf (al-Qur’an Yusuf 12). In his commentary, Tabari has quoted a report which shows that the people of Prophet Shuaib used to discount or reduce the weight of the coins which was prohibited by Prophet Shuaib. When. Islam came, various coins were in vogue in Arabia particularly in the main commercial centres of Tayef, Makkah and Madina. The popular currency was the Roman dinar made of gold, the Iranian  dirham made of silver and Yemenite coins made of copper. These were exchanged primarily on their face value which was not normally different from their intrinsic value. However, some people used to steal away gold and silver from the coins either by cutting their corners or otherwise which necessitated that in case of doubt these dinars and dirhams were weighed before they were accepted. During the days of Holy Prophet (p.b.u.h.) and the first Caliph, these coins continued to be in use. However, the Prophet of Islam (p.b.u.h.) gradually discouraged the barter system and encouraged monetary transactions for which he declared that gold and silver are the natural mediums of exchange and store of value. That is why in many transactions he directed that gold and silver (i.e. the money par excellence) should be the basis of mutual dealing. In respect of the payments of Zakat, Mahr, Diyat, Daman, Kharaj, Jiyah, Ushr and in several other areas the respective amounts were fixed in terms of dinars and dirhams. For Mudarabah particularly the jurists of Islam had considered it necessary that the capital be paid in the form of gold or silver, i.e. cash. This was, on the one hand, to close that doors for Riba al Fadl and to put an end to the tricks of the Jews, on the other.

 

 

 

In the 18th year of Hijrah the Second Caliph ordered the preparation of first Islamic dirhams with Islamic inscriptions on them which were circulated side by side with the Roman and Iranian coins. The Bayt-ul-Mal coordinated and controlled the circulation of all these coins and ensured that debased and less pure coins are replaced by the genuine and pure ones. This first Islamic coinage was confined to silver dirhams while the golden dinars continued to be as usual. Caliph Muawiyah was the first Muslim Ruler who got some dinars. However, towards the middle of the second half of the first century the Umayyad Caliph, Abdul Malik, reviewed the entire fiscal policy, demonetized all earlier coins including dirhams and dinars of various origins and substituted them with regular and permanent Islamic coins in 74 A.H. The demonetization of earlier coins was necessary because many of them were either debased or impure and as such, had a tendency of driving the Islamic coins out of circulation. It may be noted that Muslim Scholars noted this fact and advised Abdul Malik to eliminate all pre-Islamic coins by demonetizing them so that they were totally out of circulation. The hallmark of the new Islamic coins was that their face value was exactly equal to their intrinsic value. The Umayyads not only regulated the preparation and circulation of coins but also ensured that no one violated the laws of coinage, their weightage and the rate of exchange. The historians Baladhuri and Maqrizi have preserved the details of the fiscal policy of the Umayyads.

 

 

 

The rate of exchange of these coins inter se was determined by the market forces keeping in view the respective intrinsic value of the metal concerned. Gold was the ultimate standard and it was with reference to gold that the rate of exchange in respect of other coins was determined. The position of copper fulus was, however, different. They were not considered money in themselves. They were, rather, smaller units to facilitate payment of the fraction of a dirham or other silver coins: the fulus neither had any independent reference of value in their own right nor could they replace the silver or gold coins. Had the copper fulus been independent monetary units they would have driven the silver coins out of circulation under the Gresham law. (It may be pointed out here that this law was not given by Gresham for the first time. It was noticed for the first time by Abdul Malik as pointed out earlier and was formally and academically discussed by Maqrizi. The law should therefore be called either Abdul Malik Law or Maqrizi Law).

 

 

 

The Holy Prophet (p.b.u.h.) issued instructions to regulate the exchange of the dinars and dirhams in such a way that not only Riba in deferment (al-Nasiah) but also Riba on cash (al-Fadl) is avoided. The principle of equality in the exchange of silver and gold was to prevent usurious activities in exchanges. According to Dr. Yusufuddin, in the early days of Islam the Roman, Iranian, Yemeni and other coins were in currency in the markets of Makkah and Madina. The traders going to other countries needed the currency of that particular country and got it exchanged with the available currency. The money-changers used to discount at the time of exchanging the money of a country with that of another. The Hadith material included in Bukhari (Kitab al Buyu and Kitab al Sarj) indicates that the increase or decrease prohibited by the Holy Prophet in Riba al Fadl was in the context of such exchanges. Dr. Yusufuddin interprets the Hadith “I’ reported by Hazrat Uthman that the Holy Prophet (p.b.u.h.) has said: “Do not sell one dinar for two dinars or one dirham for two dirhams in this context. This interpretation seems to be plausible and convincing because otherwise there seems to be no logic in purchasing one dinar for two dinars and one dirhani for two dirhams. A similar Hadith has also been reported by Imam Malik on the authority of Abu Huraira that the Messenger of Allah (p.b.u.h.) has said: “Dinar for dinar and dirham for dirham (may only be exchanged) without any excess or increase between the two”. Commenting on these two Ahadith, as well as on other instructions of the Holy Prophet (p.b.u.h.) in similar terms, Dr. Yusufuddin writes: “Those who may not be aware of the techniques and methods of money-changers may possibly ask after casting a cursory glance over these traditions as to who and why would accept one dinar for two dinars or one rupee for 1.5 rupees. But even an elementary student of economics would clearly understand what these Ahadith mean. Generally, the silver and gold coins of one country are exchanged for the silver and gold coins of another country. But one has to concede some discount for the procurement of other coins and currencies”. Commenting on the rationale and impact of these injunctions of the Holy Prophet (p.b.u.h.), Dr. Muhammad Yusufuddin further writes: “The international vision of the Mercy of the Worlds (Rahmat li’1-Alamin) wished to introduce international coinage and currency in the whole world. In those days, the Roman coins were costlier and enjoyed greater prestige as compared to Iranian coins because the reputation of the Iranian Government was falling due to weaknesses creeping into it. Since that vision cannot be met if discount is allowed, there is no other solution except this that all Governments should have introduced silver and golden coins of the same weight and value at international level and abolish the practice of discounting, such as the number of the days of the week and the months of the year are equal almost in all the countries. The difficulties being faced by the business world due to the machinations of money-changers, particularly the sufferings of the enslaved nations at the hands of the colonial powers are not unknown to the economists. The command of the Prophet of Islam as a universal message deserves to be considered in the light of its merits and benefits as well as the demerits of the existing practice”. In support of his views about the interpretation of these Ahadith, Dr. Yusufuddin has referred to the views of some Western Scholars. He has extensively quoted from a book entitled Money and the Mechanism of Exchange (Chapter, 14). This interpretation of the author is further supported by the tendency of the modern world to adopt uniform modes of weights and measures at the international level. These uniform standards have beet adopted to facilitate the exchange of goods both at national and international levels and to avoid any confusion, misgiving and uncertainty: The same considerations applied to a situation where the currency and coins of one country are exchanged with those of other countries with excesses and increases. Apart from being Riba, it opens the door for confusion, uncertainty and practical difficulties. Although with the introduction of paper money and fiduciary money the discussion of medieval economists about the metallic currency and coins have become less relevant, yet the principles which regulated this discussion are still applicable and the objectives which motivated Muslim jurists to control the exchange of currency and coins under strict Shariah regulations still require to be met.

 

 

 

As far as the copper fulus are concerned, it has already been pointed out that their position was not that of an independent currency. They were a form of sub-money used only to make payments of the fractions of a silver coin because it was not easy to break one silver dirham into two equal parts for making payment of half dirham nor it was easy for the Government or the money changers to issue smaller silver coins to facilitate such factional payments. Therefore, the principles developed by the jurists to .t regulate the exchange of copper lulus will not be applicable to the paper currency and fiat money of today. Today’s paper money has practically become almost like natural money equal in terms of its facility of exchange and credibility to the old silver and golden coins. It will, therefore; be subject to all those injunctions laid down in the Qur’an and the Sunnah which regulated the exchange or transactions of gold and silver.