Perspective on Islamic Banking and the Taking of Interest By John Liotti Dr. Martin Accad Fuller Theological Seminary

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The Christian Gospel and Jewish Torah all have strict prohibitions against usury and unjust interest. However the Church’s ethical stance toward the banking industry over the past centuries has eroded to the point of collusion and partnership in an unjust and oppressive economic system. What can the ‘Christian’ American System learn from Islamic Banking? In this paper we will discuss the Islamic perspective on banking, and more specifically interest and loans. We will see that the Islamic system has a greater moral compass and is a clear example to Christians and Jews on what is right and fair. We will begin with the Islamic perspective on the People of God (umma) and discuss its centrality to Muslim thought especially as it relates to matters of money. Then, we will discover how Zakah is an important part of Islamic religions structure that encourages a just economic system. Then, we will consider the practice of taking interest (riba), gaining an Islamic centered view on the practice. Finally we will discover if the Muslim view poses a prophetic critique on the American system and the Christian church’s acquiescence to the dominant economic culture. The American economic system has been lauded as the most exemplary and efficient system in the world, whole-heartedly supported by the protestant Evangelical community. The American church has embraced the values of free enterprise, hard work, self-empowerment, low taxation and ‘pulling yourself up by your boot-straps’. Religion and economics, in many U.S. churches, merge into one. Any hint of a system of higher taxation or regulation of the capital and banking system meets the ire of the conservative party. Any form of redistribution whether as a progressive tax system, food stamp subsidies or entitlement programs will catalyze a reaction of protests, fully supported directly or indirectly by the conservative Christian community, many of whom themselves are victims of an unjust economic system. Financial deregulation in the 1990’s and 2000’s created a system where the power and creativity of the banking industry was unleashed on an unsuspecting and uneducated public. Instruments such as Mortgage Backed Securities brought Wall Street investors full-force into the mortgage industry with a goal of profit making, not family or community stabilization. What once was a relatively solid and secure system where one could purchase a house and expect a decent return on investment over many years became a system where banks saw tremendous short-term profit making opportunities. Individuals, seduced by the lure of fast money, speculated on the housing market. Dangerous lending policies such as no documentation loans, sub-prime lending, interest-only loans, negative amortization loans and the like created high profit

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margins for individuals, banks and Wall Street. Housing prices inflated beyond their intrinsic values. When the bubble burst the system crashed and millions lost their homes. Their life savings were decimated. However, Americans seem to be divided on who is to blame. In 2011 the Financial Crisis Inquiry Commission, comprised of law and policy makers, investigated the crisis. Casting a wide net of blame including two Presidential administrations, the “Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans. “The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done,” the panel wrote in the report’s conclusions, which were read by The New York Times. “If we accept this notion, it will happen again.i” ” However, the housing market is only one example of unchecked capitalism in the United States. The rampant rise of the use of credit cards ensnares individuals into revolving debt with high interest rates that are for many beyond repayment. Perhaps the next victim of the deregulation of the banking industry is the college student. In 2011 “student loan defaults up, tuition rising another 8.3 percent… a new report estimating that average student debt for borrowers from the college class of 2010 has passed $25,000.ii” This is only the tip of the iceberg. There is rampant corruption and predatory practice in all area of the lending and banking industry. Car loans, rent-to-own furniture, pay-day lending outlets (many of which are owned by our national banks) are just a few of the ways the individual must be wary of abuse. The abuse of the poor and the worker is systemically imbedded into the American economic system. Where is the prophetic call in the Christian church and Jewish synagogue for economic justice and freedom? Perhaps in Islam we find the challenge to do justly and to create a system based on Biblical and ethical values. In stark contrast to this unjust system of leveraged investments and rampant lending stands the Islamic perspective on finances. Based on a strict moral code and backed by clear historical and theological boundaries, this system provides the Judeo-Christian community a clear example to follow. The Umma A foundational key to understanding the Islamic perspective on life and practice is the Umma – the community of Allah. The Umma is defined as “a community of Muslims who completely submit to the will of Allah and strictly follow the teachings of His Prophet Muhammad (PBUH). Through Allah’s will and mercy The Prophet Muhammad (PBUH) laid the foundation for the Umma. The Umma transcends all tribal, national, linguistic and racial loyalties.iii”

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Understanding the centrality of the Umma is an important jumping off point to discuss Islamic banking. The Qur’an testifies of the good and right qualities of the Umma:

“Let there arise out of you a band of people inviting to all that is good, enjoining what is right, and forbidding what is wrong; they are the ones to attain felicity.” (Qur’an 3.104)

At the center of the Umma stands the call to justice and right living. It calls for a life exemplified by a strong sense of community and faith with a heart geared toward justice and submission to the will of God. Equity is central to the understanding of the Umma. It is God’s (Allah’s) intention that the justice and equality is to be practiced within His people. There should be no lack, or want. Everyone should be treated fairly and justly. The Qur’anic understanding of the Umma supports this call to unity. It states,

“O ye who believe, fear Allah as He should be feared and die not except in a state of Islam.

And hold fast, all together, by the Rope which Allah (stretches out for you), and be not divided among ourselves; and remember with gratitude Allah’s favor on you; for ye were enemies and He joined your hearts in love, so that by His Grace, ye became brethren…”(Qur’an 3.102-103)

The individual, as part of the collective Umma, has the responsibility to keep greed in check and to have the right perspective on money and finances. The Qur’an specifically calls the Muslim to avoid greed, to be generous, to live a life with eternal perspective as one strives to please God (Allah) and serve the community of believers. The Qur’an speaks harshly of a life of waste and excess and calls the individual to avoid overspending. It states,

“…waste not by excess, for Allah loveth not the wasters.” (Qur’an 7.31)

The Qur’an also encourages Muslims to live in a budget, stay within their means and avoid the extremes of extravagance. It commends,

“Those who, when they spend, are not extravagant and not niggardly, but hold a just (balance) between those (extremes).” (Qur’an 25.67)

Islam calls Muslims, out of a spirit of contentment and faith to give alms and care for the needy. It calls the faithful to have eternal perspective on God’s (Allah’s) providential concern for His people and that living a life of faith and generosity clarifies one’s perspective. It states:

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“If only they had been content with what Allah and His Messenger gave them, and had said, ‘Sufficient unto us is Allah! Allah and His messenger will soon give us of his bounty to Allah do we turn our hopes! Alms are for the poor and the needy, and those employed to administer the (funds): for those whose hears have been (recently) reconciled (to Truth); for those in bondage and in debt in the cause of Allah.” (Qur’an 9.59-60)

It is understood that the individual Muslim is not an island unto himself, but is called to live in the context of the larger community of faith. Actions matter to oneself, to one’s family, to one’s community of believers and ultimately how the Umma itself interacts with the world. The Qur’an also is clear in establishing the fact that money should not just circulate between the wealthy or those without need, but should be used specifically to help the powerless. It states,

“What Allah has bestowed on His Messenger (and taken away) from the people of the townships, - belongs to Allah – to His Messenger and to kindred an orphans, the needy and the wayfarer, in order that it may not (Merely) make a circuit between the wealthy among you. So take what the Messenger gives you, and refrain from what he prohibits you. And fear Allah, for Allah is strict in punishment.”(Qur’an 59.7)

The Zakah To insure this perspective, God (Allah) instituted the zakah as one of the Five Pillars of Islam. This equates the giving of alms (charity) with the other Pillars including fasting, the Hajj and daily prayers. Zakah is a descriptive term. It “implies that paying out alms is in fact purifies and cleanses the rest of ones assets.iv” Zakah is compulsory payments of a portion of one’s annual savings and assets. It requires one to pay an annual sum of 2.5% on the value of jewelry, cash and precious metals. It is not intended to be either charity or tax. If it were a tax it would imply that the money was to be used for societal needs such as infrastructure or roads. Nor is it charity, as that would imply that it is voluntary or optional. Zakah instead is to be looked at as worship. It reminds the believer that everything belongs to God. The purpose of paying zakah is to “foster mutual caring and support between members of the community- both the rich and the poor,v” It is intended to purify the self, one’s soul, the assets of one’s household and to elevate the spiritual soul of purity and excellence. It illuminates the intrinsic connection that exists in the Islamic understanding of justice, fairness and faith; how one manages one’s finances as well as his use of financial instruments. This indicates on whether he

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is a good Muslim or not. It is the backbone of the Islamic economic system and Shari’aa law. The Qur’an has a specific perspective on zakah. It illuminates that by paying zakah, one’s needs will be taken care of and there will be no fear of one’s financial status. It calls the believer to trust God by caring for each other and the poor. It states:

“Indeed, those who believe and do righteous deeds and establish prayer and give zakah will have their reward with their Lord, and there will be no fear concerning them, nor will they grieve.” (Qur’an 2.277)

Islamic history underlines the importance of zakah. The first Caliph Abu-Bakr, who guided the newly founded religion after the death of the Prophet, specifically waged a campaign against those who refused to pay zakah. Furthermore, the zakah system encourages Muslims to reinvest in their community. By not accumulating liquid assets and through investment in the community, the individual can pay less zakah. While this could be seen as circumventing the system, it encourages diversification through deployment of one’s assets in a manner that supports the greater Umma. All of this shows the importance of money and the way finances are handed to the Muslim. Islam is neither silent nor ambivalent about how money is viewed, used and distributed. Money, and therefore resources and power, are a gift of God. The Muslim is required, under severe judgment from God to care for the Umma, the poor and the world. To do less would put one in danger of the fires of hell. The manner in which Islam view of finance and responsibility not only produces a culture which cares for the poor and their needs, but also inculcates a spiritual benefit that is bestowed on an individual and contributes “enormously toward producing that cohesiveness and spirit of solidarity which is especially necessary for a (young) struggling community (emphasis mine) vi”. The Prohibition Against Riba and the Abuse of Money The centerpiece of the Islamic view of riba is loosely translated in the charging of interest. It could also be expanded to other forms of lending and usury was found in the Meccan portion of the Qur’an. Riba comes from the Arabic verb raba which means ‘to increase.” Over the centuries Jurists have analyzed the term. It has been defined as, “trading two goods of the same kind in different quantities, where the increase is not a proper compensation.vii” The first mention in the Qur’an was in 30.39 which states:

“That which you give in usury for increase through the property of (other) people, will have no increase with Allah: but that which you give for charity,

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seeking the Countenance of Allah, (will increase): it is these who will get a recompense multiplied.”

This type of riba charged interest only at the maturity of debts from interest-free loans and credit sales and compounded at later maturity debts. The first verses of the Qur’an regarding riba were revealed in Madina. It forbade the pre-Islamic style riba found in Arabia. Sources indicate that the prohibition of riba was revealed in the third year of the Hirja, after the Battle of Uhud. Defeated in battle there was talk in Madina that the Makkans raised money for the battle by financing through riba. Concerned about the unjust use of riba, the Prophet strongly criticized its use. The Qur’anic verse 3.130 seems to support this:

“O ye who believe I devour not Usury, doubled and multiplied, but fear Allah, that ye may really prosper.”

Its prohibition came in the context of uplifting the spirit of those defeated in battle and putting their lives back together.viii Some of the last Qur’anic verses to be revealed, the verses 2.275-9, ordered Muslims to abandon all remaining riba.ix It states:

“Those who swallow usury cannot rise up save as he arises whom the devil has prostrated by (his) touch. That is because they say: Trade is just like usury; whereas Allah permitted trading and forbidden usury. He unto whom an admonition from his Lord comes, and (he) refrains (in obedience thereto), he shall keep (the profits of) that which is past, and his affair (henceforth) is with Allah. As for him who returns (to usury) - Such are rightful owners of the Fire. They will abide therein.

Allah has blighted usury and made charity fruitful. Allah loves not the impious and guilty.

Lo! those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve.

O ye who believe! Observe your duty to Allah, and give up what remains (due to you) from usury, if ye are (in truth) believers.

And if ye do not, then be warned of war (against you) from Allah and His Messenger. And if ye repent, then ye have your principal (without interest). Wrong not, and ye shall not be wronged.”

While there is a difference of opinion on types of riba allowed by Jurists, in it’s simplest form, the unjust taking of interest or using money to oppress, is

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considered forbidden. In 4:161-162 there is a strict admonition against usury and blessing for those who follow God’s (Allah’s) principles regarding finances:

“That they took usury, though they were forbidden; and devoured men’s wealth wrongfully; - We have prepared for those among them who reject Faith a grievous chastisement.

But those among them where are well-grounded in knowledge, and the Believers, believe in what hath been revealed in thee and what was revealed before thee: and (especially) those who establish regular pray and pay Zakat and believe in Allah and in the Last Day: to them shall We soon give a great reward.”

According to the hadith the Prophet Muhammad further elaborated on the Qur’anic position of taking riba. Based on these interpretations not only is the taking of riba prohibited, but also the paying of riba, the witnessing a riba-based transactions and paying riba is considered one of the worst offenses in Islam. Bukhari, Muslim, and others report the Prophet as equating riba to ‘committing murder’.x Furthermore the hadith reports that the Prophet Muhammad, in talking about the seven most devastating sins, counted “eating riba.xi” as a grievous sin. Al Hakim reported, “Four (persons) very truly God will not make them enter Heaven… and the eater of riba…xii” Furthermore Bukhari and Muslim reported that the Prophet said, “that God put wrath on (cursed) the eater of riba and its payer, and those who witness and transcribe the contract involving riba.xiii” Taking all this into account it is fair to say, at its simplest form, riba is prohibited and therefore haram. There are two main types of riba recognized by all scholars with further refinement of the concept of riba brought by Shar’i scholarsxiv. The first is riba-al-jahiliyah and the second is al-fadl. Riba Al-Jahiliyah literally means ‘the riba of the age of ignorance and paganism.xv” This type of riba was commonly practiced by pre-Islamic Arabs and is particularly condemned in the Qur’an. This type of lending would include borrowing money to return it at a later date. For this loan the borrower pays interest only during the term of the loan and pays the principle at loan maturity. If the debt were not paid on time, an additional charge would be compounded on the principle to prolong the payment. In Islam there is no doubt this type of loan was specifically hated by the Prophet. In the Prophet’s Farewell Speech Ceremony of the Prophet Muhammad he states,

“Vo, everything of the affair of jahiliyyah (paganism and ignorance) is let fall under my feet, the riba of jahiliyyah is let fall, and the first riba I abolish is the riba of al Abbas son of Abd al Muttalib, it is discarded, all” (principal and interest)xvi”

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Furthermore the hadith reports,

“… and every riba of Jahiliyyah is abolished. Neither shall you make (the debtor) suffer injustice (loss), nor shall you be made to suffer injustice, but the riba of al Abbas son of Abd al Muttalib is discarded, all.xvii”

Another practice of the pagan Arabs was manipulating the lunar calendar to render certain riba contracts in default. The Qur’an strictly criticizes this practice:

“Verily the transposing (of a particular month) is an addition to Unbelief the Unbelievers are led to wrong thereby for they make it lawful one year, and forbidden another year, in order to adjust the number of months forbidden by God and make such forbidden ones lawful. The evil of their course seems pleasing to them. But God guides no those who reject faith.” (9.36)

To this day Shari’aa still renders these transactions as haram. The second type of riba, riba al-fadi, is taking a loan for payment at a later date for a higher value. In simple terms, it’s akin to borrowing $100.00 today for repayment of $125.00 in two years or borrowing 10 pounds of rice today for 20 pounds at a later date. Specifically the danger in this type of lending / borrowing is that it could lead to speculation over currency, commodities or market manipulation. Another prohibition related to riba is speculative business activities called garrar. In essence, it assumes that one party in a transaction will get the ‘short end’ of the deal. An example would be in paying for a calf before it was born (and inspected for defects) or the buying of a harvest during planting for a fixed price. The Prophet prohibits this type of activity in the Qur’an in 17.35,

“Give full measure when ye measure, and weigh with a balance that is straight; that is the most fitting and most advantageous in the final determination.”

And in 8.1-6,

“Woe to those that deal in fraud – Those who, when they have to receive by measure from men, exact full measure – But when the have to give by measure from men, give less than due. – Do they not think that they will be called to account? – On a Mighty Day, A day when (all) mankind will stand before the Lord of the Worlds?”

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Generally, gharar speaks of some form of deceit in transactions where there is an unknown about an aspect of the sale putting one of the parties at potential risk due to the uncertainty. xviii Given Islam’s high value of community and honesty, it’s no great surprise that this activity is strictly prohibited. So how is Islamic finance operated? Generally the Islamic view on banking requires shared risk and shared reward. As Paul Grieve explains, “The fund as the investor, and the entrepreneur and the initiator and manager of the enterprise share the risk and the depositors behind the fund, who provide the capital, are paid a portion of the profit rather than a fixed rate of interest.”xix The modern world poses challenges to the Islamic perspective on banking and there are many divergent opinions about the technical aspects of banking and finance. Judeo-Christian Perspective on Interest As we began the discussion of the topic with the Umma, we will begin with the biblical concept of justice. Amos chastises the abuse of the poor in Amos 5: 11-12,

“You trample on the poor and force him to give you grain. Therefore, though you have built stone mansions, you will not live in them; though you have planted lush vineyards, you will not drink their wine. For I know how many are your offenses and how great your sins.

In Verse 24 he proclaims,

“But let justice roll on like a river, righteousness like a never-failing stream!” The Jewish Torah and prophets is replete with the call to justice and righteousness. The concepts of justice and mercy are central regarding how those in poverty, the alien and the general community are treated. Specifically, the practice of lending money unfairly is addressed in the passage in Exodus 22:24-26. The verses read:

“My anger will be aroused, and I will kill you with the sword; your wives will become widows and your children fatherless. “If you lend money to one of my people among you who is needy, do not treat it like a business deal; charge no interest. If you take your neighbor’s cloak as a pledge, return it by sunset, because that cloak is the only covering your neighbor has. What else can they sleep in? When they cry out to me, I will hear, for I am compassionate.”

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The prophet Habakkuk warns the great powers of his day that a result of their unjust actions will include debtors coming to call and the aggressor will become the victim. He states in Habakkuk 2:6-7,

“Woe to him who piles up stolen goods and makes himself wealthy by extortion! How long must this go on? ’Will not your debtors suddenly arise? Will they not wake up and make you tremble? Then you will become their victim.”

Moses further expounded on the prohibition against taking interest from the poor in Leviticus 25:35-37,

“If one of your countrymen becomes poor and is unable to support himself among you, help him as you would an alien or a temporary resident, so he can continue to live among you. Do not take interest of any kind from him, but fear your God, so that your countryman may continue to live among you. You must not lend him money at interest or sell him food at a profit.

Jesus further clarified the Christian perspective on money and how we serve our brothers is central to being a good Christian. In Matthew 24:30-42, in the parable of the Sheep and Goats he states:

“When the Son of Man comes in his glory, and all the angels with him, he will sit on his throne in heavenly glory. All the nations will be gathered before him, and he will separate the people one from another as a shepherd separates the sheep from the goats. He will put the sheep on his right and the goats on his left.

“Then the King will say to those on his right, ‘Come, you who are blessed by my Father; take your inheritance, the kingdom prepared for you since the creation of the world. For I was hungry and you gave me something to eat, I was thirsty and you gave me something to drink, I was a stranger and you invited me in, I needed clothes and you clothed me, I was sick and you looked after me, I was in prison and you came to visit me.’ “Then the righteous will answer him, ‘Lord, when did we see you hungry and feed you, or thirsty and give you something to drink? When did we see you a stranger and invite you in, or needing clothes and clothe you? When did we see you sick or in prison and go to visit you?’

“The King will reply, ‘I tell you the truth, whatever you did for one of the least of these brothers of mine, you did for me.’

“Then he will say to those on his left, ‘Depart from me, you who are cursed, into the eternal fire prepared for the devil and his angels. For I was hungry

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and you gave me nothing to eat, I was thirsty and you gave me nothing to drink…’ ”

Conclusion In my lifetime our world has changed. Credit in the past 20 years has become easy to obtain and use. The deregulation of Wall Street has been like blood in the water, calling the sharks to the kill. This has led to the decimation of the American middle class, record foreclosure rates and the destabilization of our communities. Furthermore, predatory lending practices like pay-day lending, rent-to-own outlets and the rampant corruption in the used car market specifically target the poor, the immigrant and the oppressed. It is important to note the wisdom of the Islamic thought toward banking. Given the two types of lending specifically discussed above, the taking of interest on money loaned and forms of market speculation, we see these activities are the backbone of the American lending economy. Speculation and interest are the basis of massive profit taking by our major banks. These unchecked practices most recently facilitated the crash of the Great Depression and current Great Recession. If our (supposedly) Christian nation would follow Islamic example our financial condition would be much more secure and blessed by God. Sadly, the Christian and Jewish communities not only are complicit in their support and promotion of this economic system but also have used their theological perspectives to advance the practice of taking unjust interest. All of this despite the clear admonitions in the Torah, the Prophets and the Gospels mentioned above. The Islamic view of lending and banking provides a clear example of a just system with clear boundaries on ethical lending. Our communities have much to learn from our Islamic brothers and sisters. We would do well to study the prohibition of riba and realign our thinking to the foundations of our faiths. This would reposition our faith communities toward a perspective of loving God and loving our neighbor. i Chan, Sewell, “Financial Crisis was Avoidable, Inquiry Finds,” The New York Times, January 25th, 2011, accessed December 3rd, 2012, http://www.nytimes.com/2011/01/26/business/economy/26inquiry.html?_r=0 ii Pope, Justin, “Student Loans, the Next Bubble?,” The Huffington Post, November 6th, 2011, accessed December 4, 2012, http://www.huffingtonpost.com/2011/11/06/student-loans-the-next-bu_n_1078730.html

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iii Kateregga, Badru D. and Shenk, David W., A Muslim and a Christian in Dialogue, (Harrisonberg, Virginia: Herald Press, 2011), p.83 iv Abdul-Rahman, Yahia, The Art of Islamic Banking and Finance, Tools and techniques for Community-Based Banking, (Hoboken, New Jersey: John Wiley & Sons, Inc., 2010), p.35 v Abdul-Rahman, p. 35 vi Rahman, Fazlur, Islam, (Chicago: The University of Chicago Press, 1979), p. 15 vii El-Gamal, Majmoud A., Islamic Finance, Law, Economics and Practice, (New York: Cambridge University Press, 2006), p. 49 viii Monzer, Kahf, “Riba as Described in the Qur’an and Sunna”, accessed December 6, 2012, https://www.lariba.com/knowledge-center/articles/pdf/Riba%20as%20described%20in%20the%20Qur%27an.pdf ix El-Gamal, p. 50 x Abdul-Rahman, p. 32 xi Bukhari, Muslim and others as quoted in al Targhib wa al Tarhib v.3 p.1 xii Al Targhib wa al Tarhib, v. 3 p. 5 xiii Abdul-Rahman, p. 46, footnote 36 xiv El-Gamal, p. 49 xv Abdul-Rahman, p.41 xvi as reported and authenticated by Muslim xvii narrated by Abu Dawood and Tirmidhzi xviii El-Gamal, p. 58 xix Chapman, Colin, “Cross and Crescent, Responding to the Challenge of Islam,” (Downers Grove, IL: Intervarsity Press, 2007), p. 153