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

 

Al-Qur’an Majid: Verses (4:160-161); Surah al-Baqarah, Verses 278-279; Qur’an 6:57; 7:54; Surh Al-i-hnran 111:130; Al-Baqarah: Verses 275-276; 2:188; 4:29; 4:161; 9:34: 30:39; 4:161; Tafsir and Hadith by Qatadah ibn Di’amah (d.120 A.H.), Tabi’l: Islam Ke Ma’ashi Nazaviyye by Dr. Yusufuddin Vo1.lI, Karachi, 1984; Unlawful Gain and Legitimate Profii in Islamic Law by Dr. Nabil A. Saleh; I’lam-al-Mawaqqrin, Vol.II, p.154ff, “COMMERCIAL INTEREST KI FIKHI HAISIAT” by Maulana Muhammad Jaafar Shah Phulwarwi and Syed Yaqoob Shah; Stiengass English Arabic Dictionary, Lahore 1979, the word `interest’; `A Dictionary of Islam by Thomas Patrick Hughes, Lahore, 1964, p.544; Exold, xxii, 25,,Lev. XXV. 36 (Usuri); Tafsir Tabari by Imam Tabari (VOl.III, p.64); Kitab al-Nihayah fi-Gharib al-Hadith wa Athor by Ibn al-Athir, Cairo 1322 AH Vol.II, p.66; Ahkam al-Qur’an by Ibn ‘Arabi, Cairo, 1957, Vol.I, p.242; AI-Haidayah by Allama Burhanuddin al-Maghinani; Book XIV on sale, Chap. VIII on Riba; Hidayah English Translation by Hamilton, Lahore, p.289; Tafsir al-Kabir by Imam Fakhar Al-Din Al-Razi; Ahkam al-Qur’an by Allama Jassas, Istanbul, 1335 AH Vol.l, p.469; AIR 1944 Mad.243; Halsbury’s Law of England, para.106 Vol.32, 4th Edn.; Futuha al-Buldan by al-Baladhuri, Cairo 1932 p.67; aiBahr al-Muhit by Abu al-Abdulasi Vo1.II, p.335; Tabari, commentary of the Qur’an, Vol.IV, p.55; Futuh al-Buldan by al-Baladhuri, Leiden, p.56, Tayef; Verses 130 of Al-Imran by Tabari; Kitab al-Amwal by Abu Ubaid alQasim ibn Sallam paras.506-507; Kitab al-Amwal by Abu Ubaid, para.502; Book Islam Ke Muashi Nazariyyea, Karachi 1984, pp.44--50; Tijarati Sud. Tarikhi Awr Fiqhi Nuqtah-I-Nazar Se Aligarh 1967, pp.l-5 and Shorter Encyclopedia of Islam 1953, p.471 ref.

 

(dd) Interpretation of Holy Qur’an---

 

----Principles.

 

(ee) Islamic Jurisprudence---

 

---- Riba---Kinds---Riba al-Fadl---Riba al-Nasi’ah---Concept and nature--Prohibition---Extent.

 

(ff) Islamic Jurisprudence---

 

---- Riba---Prohibition---Extent---Loans taken by tribes from each other, each tribe acting like a large partnership company---Islam abolished the interest based nature of such relationship but re-organised same on the basis of profit-and-loss-sharing whereby the financier got a just share and the entrepreneur did not get crushed under adverse conditions, one of which was the caravan being waylaid during the journey.

 

AI-Qur’an Majid: 3:130-2 ref.

 

(gg) Islamic Jurisprudence---

 

---- Riba---Prohibition---Islamic economic order---Any attempt to treat the prohibition of Riba as an isolated religious injunction and not as an integral part of the Islamic economic order with its overall ethos, goals. and values, is bound to create confusion.

 

(hh) Islamic Jurisprudence---

 

---- Riba---Concept---Rib a has a broader concept and stems from a violation of the Qur’anic decree that loans and debts must be settled on an equal basis and object for which loans are taken is also unimportant for purposes of Riba---Correct approach to understand Riba would be to treat same as a technical term in the Qur’an and Hadith like Salah, Saum, Zakah and Hajj and to determine its meaning with reference to these two primary sources of Islamic knowledge---All loans and debts must be settled on an equal basis (in terms of the units of the object of the loan/debt) and same principle is to be followed in retiring debts created in lieu of, for example, sales or purchases on deferred payment or delivery basis---If a loan or debt is not handled in such a manner, that would constitute a violation of the law of Islam about Riba and, hence, give rise to Riba.

 

Riba is the predetermined, fixed and time-related, increase over and above the principal of a loan or debt A distinction is also ‘maintained between Riba al-Nasi’ah (Riba in loans) and Riba al-Fadl (Riba in trading). Several explanations are offered to rationalize the law of Riba. The most important of these explanations is that through the prohibition of Riba, Islam puts an end to Zulm (exploitation or injustice). Occurrence of Zulm is often traced to lenders seeking a return while borrowers might be in dire need of funds. Another conclusion drawn-with reference to the permissibility of trade is that guaranteed return claimed by owners of capital is despicable because other economic agents have to exert effort and/or expose themselves to risk .for seeking any gains. While these explanations may have some element of truth in them, they leave much to be desired. For example, they become less convincing when one finds that Shariah does not, in normal conditions, prescribe any ceiling on prices and, thereby, the rate of profit even when trading activities may carry little or .no risk but it is to be remembered that charging of exhorbitant or excessive profit is not conceived.

 

A correct approach to understand Riba would be to treat it as a technical term in the Qur’an and Hadith, like Salah, Saum, Zakat and Hajj, and to determine its meaning with reference to these two primary sources of Islamic knowledge. Briefly, the argument can be understood with reference to the basic verdict on Riba in the Qur’an. In the light of al-Baqarah 2:279 which restricts creditors to their principals, this decree can be stated as follows: All loans and debts must be settled on an equal basis (in terms of the units of the object of the loan/debt). The same principle is to be followed in retiring debts created in lieu of, for example, sales or purchases on deferred payment or delivery basis. If a loan or debt is not handled in this manner, it would constitute a violation of the law of Islam about Riba and, hence, give rise to Riba.

 

Interest is a predetermined, fixed and time-related excess on loans and debts. But as explained above, Riba is a broader concept. It stems from ;t violation of the Qur’anic decree that loans and debts must be settled on an equal basis. Likewise, the purpose for which loans are taken is also unimportant for purposes of Riba.

 

(ii) Islamic Jurisprudence---

 

---- Riba---Prohibition---Bank interest is Riba---Rationale.

 

At present, bank transactions involving interest come under the purview of loan transactions. Thus bank interest is Riba. That modern banks have no precedent in Islamic history is no ground for treating bank interest differently from Riba for two reasons. First, notwithstanding their complex nature, banks still personify groups of individuals-their shareholders. Hence, the prohibition of Riba applicable to individuals automatically carries over to banks. Second, again notwithstanding the complexities of modern transactions, they are still combinations of primary transactions-such as lending, trading, leasing, partnership, etc.-for which the basic principles have been laid down. Any change in the nomenclature of interest to `markup’ or ‘profit’ is inconsequential from the point of view of Riba as long as the basic transaction between banks and their customers remains a loan transaction.

 

Riba arises in loans, and profits in trading. A loan transaction represents the case of temporary exchange-give and take back- of property rights of the thing at hand for the pendency of the transaction. Trading, oil the other hand, is a case of irrevocable exchange of property rights between two parties: ownership of the object of sale goes from the seller to the buyer and that of the thing paid toward price from the buyer to the seller. Alternatively, one may view the loan transaction as a homogeneous exchange and trading as a heterogeneous exchange. Thus, Riba and profits relate to two different situations with their own legal implications. Accordingly any comparison between the two is unwarranted. This point also applies to profits versus interest comparisons. Economists have viewed profits as reward for risk-taking. This interpretation is only partly true. Primarily, profits arise in trading in which two parties are involved in the process of reciprocal and irrevocable exchange of then property rights. On the other hand, lending involves transfer of some of the rights related to that property only for the pendency of loan-a limited period. The claim to a reward from another party through loan transactions, albeit Riba, is not recognized in Shariah.

 

Bank interest does fall under the definition of Riba. Banks have normally two tier transactions. On the one hand, they accept money from the savers and pay them return on their savings. On the other hand, they lend money to the entrepreneurs who pay return to the banks at a rate higher than the one paid by the banks to the savers. Let us take the second tier first. The money provided by the banks to the entrepreneur is undoubtedly a loan. Any increase on the principal amount paid by entrepreneur to the bank must and does fall under the category of Riba al-Nasi’ah about the prohibition of which none has any reservation. It is besides the point whether the entrepreneur employs and invests that money in a business, commerce, trade or industrial enterprise. As long as the repayment of the principal amount is guaranteed whether because of the collateral or otherwise it will remain a loan (Qarz) and shall be subject to the principles of Shariah regulating loan (Qarz). Moreover, the concern of the banks is never to ensure the success of the enterprise or to participate in the risk at any stage in any way. There is no moral or legal justification to demand any increase over this amount. As to the money of the savers with the bank it is normally claimed to be an Amanat (Trust). Had it been really a trust it should have been regulated and managed under the law of Trust. For all practical, legal and theoretical purposes it has never been considered to be an Arnanat or Trust. It is always and has always been treated to be a loan and meets all the required ingredients of a loan (Qarz) under the Shariah; its repayment is guaranteed and the bank has full freedom to use, spend and invest it in any manner which the bank decides; the saver cannot even take it back at will without meeting certain conditions. In some cases a saver can take it back only in instalments and in other cases he has to give prior notice to the bank of his intention to withdraw his ‘Arnanat’ from the bank. Now, if it is a loan, no increase can be admissible thereon under the definition of Riba.

 

(jj) Islamic Jurisprudence---

 

----Riba---Prohibition---Hasan-i-Ada---Concept---Scope---Deposit in Government-sponsored saving schemes, Defence Savings Certificates, Treasury Bills, Federal Investment Bonds, Foreign Exchange Bearer Certificates, Prize Bonds and their likes, all being debt insialments and direct money-for money exchanges, interest, mark-up or “profit” offered on them is nothing but Riba irrespective of the name given to it---Principles.

 

Deposits in Government-sponsored saving schemes, Defence Savings Certificates, Treasury Bills, Federal Investment Bonds, Foreign Exchange Bearer Certificates, Prize Bonds and their likes, are all debt instalments’. The fact that it is the Government which is on the other side of the contract does not change the character of the transaction. A loan is a loan whether it is taken from an individual, a group or an institution. From the Shariah point of view, all these instruments represent “loan” contracts between the Government and the parties subscribing to these instruments. The holder, in each case, gives money and wants his money back, and there is no other contract governing the legal relation with the issuer of these instruments. In a technical sense, therefore, these are all direct money-for money exchanges. Accordingly, interest, mark-up or “profit” offered on them is nothing but Riba irrespective of the name given to it. The same argument also applies to zero-coupon bonds in which case buyers pay a lesser price initially but receive a greater sum equal to the face value of the bonds. Some people mix up the question of Government loans with the concept of Hasn-i-Ada or better repayment found in the Ahadith. 1t is contended that the Prophet of Islam (peace be upon him) used to please his creditors at the time of repayment of loan by paying him more than what was his due. It is pleaded that if the Government on its own pays or gives more than the amount received, it should not be considered Riba because it is not pre-fixed or predetermined. This pleat may appear to be plausible on the face of it but this increased payment cannot he called Hasn-i-Ada. A Hasn-i-Ada was never declared beforehand, was never expected by the creditor and was never allowed to him as a matter of right. Moreover, it was a personal favour by the Holy Prophet (peace be upon him) to his creditor.

 

(kk) Islamic Jurisprudence---

 

....Riba...Prohibition---Extent-Rent in a lease contract involves the transfer of usufruct of an asset while ownership remains with the lessor, therefore rent in such a case was not Riba---Principles.

 

Rent arises in a lease contract that involves the transfer of usufruct of an asset while ownership remains with the lessor This is essentially a different arrangement as compared to a loan contract Therefore, there is no point in equating rent with Riba, Alternatively, one can say that, for example, house rent is not Riba because the tenant and the landlord enter into a transaction of money for housing services-a heterogeneous exchange-whereas Riba arises in give and take back of items of the same kind.

 

(ll) Islamic Jurisprudence ---

 

----Riba---Prohibition extent ---Mudarabah and Musharakah transactions are outside the purview of Riba---Similarly Muzar’ah and Musaqaat being two special kinds of partnership is not Riba---Principles.

 

In Mudarabah and Musharakah- two forms of business partnership-the financier is also a legal party to the use of funds. Thus, these transactions are fundamentally different from a loan transaction. Accordingly, both these transactions are outside the purview of Riba. Similarly, Muzara’ah and Musaqaat-two special kinds of partnership-as such have nothing to do with Riba.

 

(mm) Islamic Jurisprudence---

 

---- Riba---Prohibition---Zulm---Riba may lead to Zulm, and thus, the prohibition of Riba would result in putting an end to exploitative practices--End of Zulm, however, is not the genesis of prohibition of Riba---Principles.

 

Riba may lead to Zulm, and thus, the prohibition of Riba would result in putting an end to exploitative practices. But it does not necessarily follow that an end of Zulm is the genesis of the prohibition of Riba. Restricting the rationale of the prohibition of Riba to the elimination of Zulm as referred to in al-Baqarah 2:279 is mistaken for two reasons. First, the verse points to the existence of some dispute between two parties that was settled through this verse, while the end-of-exploitation explanation is given independent of the nature of the dispute. Second, the factual position was that according to this verse, both creditors and debtors were directed to give each other their respective rights in the light of the Shariah. It is pertinent to note that in the earlier revelations about the prohibition of Riba, the directive was that loan transactions be contracted and debts retired on equal basis, and there is no mention of Zulm or its equivalent.

 

(nn) Islamic Jurisprudence---

 

----Riba---Prohibition---Indexation---Inflation---Paper currency---Debts denominated in paper currency are not exempted from law of Riba---No Shariat law, however, exists on taking remedial steps to neutralize the effect of inflation for loan or other debts created through credit transactions--General principle in that regard would be that not only the means but also the ends should be Shariat compatible---Recommended strategy would be to eliminate unanticipated inflation from the economy through prudent Government policies and to make anticipated inflation a part of decision making by all concerned, keeping in view their, needs and other interests--Principles illustrated.

 

According to the law of Riba, all loans and debts are to be settled on an equal basis in terms of the units of the object of loan or debt. In the case of paper currency, the exchange takes place by counting. Accordingly, the following conclusion would be drawn for loans for debts denominated in, for example, rupees: if the sum lent (or debt contracted) amounted to Rs. 1,000 the lender (creditor) may claim only one thousand rupees by counting - no more, no less. This argument may also be restated, again, in the context of Riba, as follows:

 

(i) The nature of a loan transaction does not change with inflation. So, there are no grounds for changing the scope of the application of the law in inflationary regimes.

 

(ii) Lenders already incur transaction costs associated with loan transactions. Inflation just escalates those costs. So, there are again no grounds for changing the applicability of the law.

 

(iii) A lender may get nothing if the borrower expires without leaving! behind anything because debt is not transferable from one generation to the next through inheritance. Thus, reduction in value of loans and debts to zero does not represent a new situation, vis-a-vis the original rules dealing with Riba, that merits special treatment.

 

The factual position about the other ground for indexation-putting an end to injustice to lenders and creditors - has been clarified above. It can also be substantiated by noting that when Allah the Almighty directed the creditors to give grace period to debtors in a tight situation (al-Baqarah 2:280), the extension was clearly with reference to the then existing debt obligations, not the inflation-adjusted principal in future. In view of this there are no grounds for exempting loans and debts denominated in paper currency from the law on Riba. But despite the above analysis and conclusions drawn against indexation, there is no Shariah bar on taking remedial steps to neutralize the effect of inflation for loan and other debts created through credit transactions. A general principle in this regard would be that not only the means but also the ends should be Shariah-compatible Keeping this in view, a recommended strategy would be to eliminate unanticipated inflation from the economy through prudent Government policies. and to make anticipated inflation a part of decision-making by all concerned-keeping in view their needs and other interests Thus, for example, instead of there being a loan to a needy person to fulfil his consumption or business need, there may be either a Bai’ Mu’ajjal or a partnership arrangement between the resource-owner and the needy party. While the need of the latter may be fulfilled, concerns of the former may be accommodated through the margin added in the deferred price or automatically adjusted through the realized profits.

 

(oo) Islamic Jurisprudence---

 

----Riba---Prohibition---Application---Principles---Relevant laws of Shariat which prohibit Riba are binding on individual believers as well as :on any collective entity that represents them and their Governments---Said laws also apply to non-Muslims subjects of a Muslim State---Prohibition of Riba applies to both taking and giving Riba which implies that regardless of whom one may be transacting with and where, that person or anyone representing him ought to observe and abide by the prohibition of Riba--Prohibition of Riba essentially requires that, generally speaking, all like-for-like exchanges be, executed on an equal basis in terms of the relevant units of exchange and to pursue an alternative permissible course of action if this does not suit any one.

 

(pp) Islamic Jurisprudence---

 

---- Islamic Banking---Basic principles in which the edifice of Islamic Banking and finance rests, enumerated.

 

The half a century long experience in the field of Islamic banking has brought to the fore a number of basic principles on which the edifice of Islamic banking and finance rests. Without having a clear perception of these fundamental axioms, no meaningful or worthwhile progress can be made in the direction of establishing Islamic banking. Before discussing the alternative modes of financing and investment suggested or put to operation so far, the suggested restructuring of banks and financial institutions and other necessary steps to be taken, it is appropriate that these axioms are enumerated in clear and specific terms:

 

(i) The banks under the Islamic system shall continue to perform their primary functions of receiving money from the savers and making it available lo various enterprises, entrepreneurs, business and businessmen. This exercise will be totally free from any involvement of Ribs, Qimar, Gharar and such other practices which have been prohibited by the Shariah.

 

(ii) Riba is prohibited in all its forms. There is no difference between usury and interest, simple and compound interest, interest on nominal rate and interest on exorbitant rates, All these forms of interest fall under the category of Riba and are prohibited,

 

(iii) All transactions should be in exchange of commodities, goods, services or labour, No purely monetary transaction should be made because such transactions eventually lead to opening the door of Riba.

 

(iv) Loans should be avoided as far as possible in all commercial and business transactions. Financing on the basis of loaning and lending has no place in Islamic Shariah because the enterprise undertaken on the basis of lending and borrowing creates loopholes for usurious practices,

 

(v) Lending and borrowing may be resorted to in exceptional cases to meet any emergency or contingency; but it should always be by a way of Qard-i-Hasan.

 

(vi) Banks under the Islamic system shall be primarily financial intermediaries to finance through equity, participation or partnership. Banks may also work as holding companies and may, where feasible, also directly engage themselves in commercial, industrial agricultural and other enterprises and businesses.

 

(vii) Any transaction or enterprise which is free from the fundamental prohibitions enumerated in the Shariah is Islamically allowed subject to other requirements laid down by the Shariah or the law,

 

(viii)      Banks may render their services and undertake their operations in accordance with any of the forms or alternatives hereinafter enumerated; subject to the fundamental consideration of equity and risk participation:

 

(a)        Mudarabah.

 

(b)        Musharakah.

 

(c)        Leasing.

 

(d)        Murabahah.

 

(e)        Bai Salam.

 

(f) Bai-Muajjal.

 

(g) Istisna (Pre-production sale).

 

(h)        Muzaraah.

 

(i) Musaqah.

 

(j) Agency.

 

(k) Service charges.

 

(l) Qard-i-Hasan.

 

(m)       Buy - Back Agreement (subject to certain conditions).’’

 

(n)        Hire-purchase.

 

(o)        Sale on instalments.

 

(p)        Developmental charges.

 

(q)        Equity participation.

 

(r)        Refit sharing.

 

(s)        Sale and purchase of shares in such companies which have tangible assets.

 

 

(t) Purchase of trade bills.

 

(u) Financing through Auqaf.

 

There might be some duplication and over-lapping in some of these modes mentioned above but these are some of the examples which only show how different scholars and experts tried to develop modes of financing and investment keeping in view the framework of the Shariah. These modes, even if the list is expanded, will not in any way be exhaustive because new modes and techniques will keep on coming into existence. It is always the need of the entrepreneurs and the requirements of the market which give rise to new and novel modes and techniques. The approach of Shariah is not to lay down a set of exhaustive modes or techniques and prohibit the rest. The approach of the Shariah is just the other way round. It prohibits certain practices and permits the rest. These and any other Shariah modes are to be understood and applied in the light of this observation. Alternatives do exist which are being practised in Islamic banks and can easily be developed into viable alternatives. .