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If banking is based on interest-free transactions, what would be its basic practical shape in conformity with the Injunctions of Islam? PDF Print E-mail

Q: If banking is based on interest-free transactions, what would be its basic practical shape in conformity with the Injunctions of Islam?

A: Practically, the interest-free banking system can be structured on tripartite arrangement, between depositors, banks and borrowers. The nature of arrangement will vary in different cases as summarised below:

Contemporary fatawaa



Q: 25- What is the definition of Riba ('9) according to the Holy Qur'an and Sunnah of the Holy Prophet saw. Does it cover the simple and compound interest existing in the present day financial transactions?

A: The word, Riba as understood from the Holy Qur'an and Sunnah, is any extra payment received over and above the principal amount, regardless of the fact that extra amount is significant or insignificant. Islam, therefore, considers the Riba Haram, in all of its forms.

The Fuqaha have given two interpretations of the word, Riba,: Riba-al-Nasia and Riba al Fadl Riba al-Nasia is defined as,

Which is translated as:

"Any lending arrangement that obligates the borrower to pay a certain extra amount over and above the payment of the principal amount against the specified deferment".

Similarly, Imam Baihaqi reports the interpretation of Riba by Hazrat Fuzalah Ibni Ubaid rdi.:

"Any lending arrangement which results in some benefits to the lender, is one of the kinds of Riba".

It is important to note that the Ayahs of Holy Qur'an prohibiting interest relate to Riba al-Nasia.

"0 Ye who believe, fear Allah and give up what remains of your demand for usury if Ye are indeed believers" (al-Baqara 278).

"lf Ye do it not, take notice of war from Allah and his Apostle, but if you desist Ye shall have your capital sum: Deal not unjustly, and Ye shall not be dealt with unjustly". (al- Baqara, 279)

At the time of revelation of the above Ayahs, the prevalent form of Riba was Riba al-Nasia. Therefore, the companions of the Holy Prophet. understood the meaning of these Ayahs in terms of Riba al-Nasia. Thus Riba alNasia was categorically regarded Haram in matters of Qarz. (Loan transactions : QARZ)

Riba al-Fadl occurs in those commodity exchange contracts where a contract provides payment of any extra quantity of the commodity.

For instance, one kilogram of wheat is exchanged for more than one kilogram of wheat, regardless of quality consideration. What matters is, that a given quantity is to be exchanged for the same quantity. In this case, the Hadith of the Prophet saw.

"Sell gold by gold, =silver by silver, dates by dates, wheat by wheat, salt by salt, and barley by barley like for like and equal for equal so he who made an addition or who accepted an addition, committed the sin of taking interest. But sell gold for silver as you like but hand to hand and sell barley for dates as you like but hand to hand."

Though the above Hadith mentions the incidence of Riba in six things but the Fuqahah have extended the application of this Hadith to all commodity transactions characterized by the same underlying reason. Whenever the same commodity is exchanged for more (Quantity), the Riba al-Fadl will arise.

In the light of above explanation, it is clear that the word 'Interest' as commonly understood in context of banking/financial pertains to the Riba al-Nasia. Therefore, any extra payment specified in Qarz relating contract over and above the principal amount, falls under the definition of Riba al-Nasia, irrespective of the rate/amount of the extra payment. Hence, both the Simple and the compound interest are prohibited as being Riba al-Nasia.

Some people, perhaps have misunderstood the meaning of the verse,

"0 ye who believe, devour not usury doubled and multiplied but fear Allah that Ye may (really) prosper". (3:130)

And have tried to argue the permissibility of the simple interest. This is totally wrong conclusion.

As a matter of fact, the Holy Qur'an wants to root out an interest mentality as appears from verse (2:279). Ibn-e Jareer has reported the interpretation of Hazrat Qatada rdi. in his tafsir.

"That the Holy Qur'an permits the lender to receive the principal amount only and does not allow any addition (however small it may be)".

Contemporary fatawaa



Q: 24- In response to my question, you have replied in the Albalagh International - November 1991 issue - that I can adjust the interest money received earlier against the loss of my principal amount in BCCI, your reply I assume, is based on the assumption that I want to adjust the interest received earlier "from BCCI" against the expected loss of principal amount deposited with BCCI. Suppose the interest was not received from BCCI or only partly received from BCCI. Now the question is that can I adjust such interest amount against the loss of principal in BCCI?. (M. S. Desai, Saudi Arabia)

A: As I have mentioned earlier whatever amount you have received or you expect to receive from BCCI, in whatever name it may be, you can take it as the part recovery of your principal, but it should be kept in mind that your total receipts from the bank should not exceed, in any case, the amount you have actually deposited in the bank. Therefore, if the bank agrees, at a later stage, to pay you more, your claim should be confined to the extent of the arrears of your principal deposit only without any excess thereon.

Contemporary fatawaa

As you know, in Saudi Arabia, Maghrib prayers are usually offered ten minutes after the call for prayers. I have recently seen one Hadith which can be rendered into English as 'No one should sit in the mosque until he has offered two rakah." (Agreed by al PDF Print E-mail

Q: As you know, in Saudi Arabia, Maghrib prayers are usually offered ten minutes after the call for prayers. I have recently seen one Hadith which can be rendered into English as 'No one should sit in the mosque until he has offered two rakah." (Agreed by all). Also, I have heard a Hadith which can be rendered into English as "Supplication between the azan and the call for the prayers is always answered."

Does that mean that we should or we can offer two Rakah prayer after the call for the Maghrib prayer but before the congregation starts and supplicate? (Ibid)

A: The Holy Prophet saw. has emphasized in a number of ahadith that the Maghrib prayer should be offered as soon after the sunset as possible. On this basis the Hanafi jurists are of the view that the Maghrib prayer should be offered immediately after adhan without any intervening prayer as nag However, other jurists are of the opinion that it is advisable to offer two rak'at as nafl before the Maghrib prayer. The present practice in Makkah and Madinah is based on this latter view. Now, when the gap of about ten minutes is, in any case, available for every person who prays in the haram, one can avail of this opportunity by praying two rak'ats before the jama'ah, and there is no bar against it in Shari'ah, even in the Hanafi school, because they prefer to avoid any nafl before the Maghrib prayer only to refrain from delaying the obligatory prayer. But when the obligatory prayer is bound to be delayed, according to the current practice in haram, pointless, to avoid the nafl prayer. So one can offer nail before Maghrib while praying in haram.

Contemporary fatawaa



Q: 23- "We have come to know that the Pakistani Banks have abolished interest from their transactions and they are now working on the profit and loss sharing basis. What is the correct position in this respect? Can we deposit our money in the PLS (Profit and Loss Sharing) account and avail of the profit accruing therefrom for our personal benefit without any fear of being involved in interest? If the answer is in negative, are there any other financial institutions where we can invest our savings without being involved in riba and who run their business on the Islamic principles and restrict themselves to those transactions only which are lawful in Shariah? (Jawald Sharafat, Karachi)

A: it is true that it was announced by the government of Pakistan about five years ago that the interest has been abolished from the banking transactions which, in future, will be carried out on the basis of profit and loss sharing. But, unfortunately, the methods adopted to substitute for the interest transactions were not in conformity with the Shariah, rather they were essentially nothing but a different form of interest. No substantial change was brought out, neither in the whole system nor in the nature of transactions. When one looks into the details of these dealings, one cannot avoid the conclusion that it is change in nomenclature only.

The result is that no actual change has yet taken place in the banking system as a whole, and the profit given by the banks to their depositors is another form of interest. Hence, it is not permissible in Shariah to deposit money in a PLS account or in a fixed deposit account of the general commercial banks. If someone wants to open an account in a bank, he should deposit his money in a current account on which no profit (interest) is paid.

As for other financial institutions, most of them are being run on the basis of interest, and the same rule applies to them also.

However, during the last decade, some financial institutions have been established on interest-free basis, and they are actually working, by and large, on the basis of Islamic financial modes. I would refer to three of them here:

1. National Investment Trust (NIT) in Pakistan has been established to provide investment facilities on Islamic principles. Since last two years the majority of its investments has become free of interest. Their investments are mostly restricted to the purchase of the Shares of different companies, and to the Murabahah and leasing transactions.

I have gone through their model agreements of Murabahah and leasing, and found therein nothing in conflict with the injunctions of Shariah.

However, the NIT keeps its surplus money in the PLS account of the normal banks run on the basis of interest. Thus, a very small proportion of their income consists of the interest accruing on their PLS accounts. This proportion is not lawful according to Shariah.

Similarly, a very small amount of their income comes out of the profit accruing on the participation term certificates (PTCs) purchased by them. The transaction of these certificates is also objectionable according to Shariah. Although they have now stopped the purchase of PTCs, yet the PTCs held by them in the past are still alive and they form a small proporfion of their annual income.

Despite these shortcomings, most of their transactions are lawful according to Shariah, and they have provided a facility to the people who want their income to be free from any element of interest. In their membership form they have mentioned all the heads of their income and it has been left to the member to mention in the form that he does not wish to receive the income of some particular Heads.

Therefore, if a person states in the form that he does not want to receive the income of PLS accounts and of PTCs, he can do so, in which case his dividend will not consist of the income of these two heads, and the dividend received by him can be treated as halaal.

2. There are certain Mudarabas floated by different Mudaraba companies  registered under the Mudaraba Ordinance. According to the Ordinance, no Mudaraba can be floated unless it has obtained a certificate from the Religious Board to confirm that the proposed business of the Mudaraba is not in conflict with the Injunctions of Islam. This Religious Board, of which I am a member, examines various aspects of the proposed business and brings amendments where necessary, and certifies after satisfying itself with its conformity with Shariah. As a member of this board, I had an opportunity to examine the main Schemes and the model agreements of most of Mudarabas floated in the market, except for two Mudarabas, namely, Grindlays Mudaraba and BRR Mudaraba. So far as these two Mudarabas are concerned, I cannot opine about them objectively. But the rest of the Mudarabas I can say that their business, if run in accordance with their prospectus and the model agreements approved by the Board, is in conformity with the precepts of Shariah, and one can buy these Mudaraba shares and enjoy the dividend distributed against them as halaal.

3. The third financial institution which is based on an interest free system is 'Faisal Islamic Bank'. The Pakistani branches of this bank have restricted themselves to the Islamic modes of finance like Murabahah, leasing and Musharakah only. I have gone through their model agreements and found them, by and large, in conformity with Shariah. One can also avail of the profits distributed by this bank to its PLS and investment accounts.'

Before parting with this question, I emphasize that what has been said above is based on my personal knowledge about the current state of affairs in these institutions. But two points should always be kept in mind: Firstly, a person like myself can only examine the main scheme of a business and the broad principles underlying it. No outsider can scrutinize each and every transaction going on in actual practice. Therefore, the aforesaid comment on the business of these institutions is based on the basic principles adopted by them in their scheme and their model agreements. If they contravene any of these principles in their actual practice, the ruling may be different. But so far as they claim to abide by these principles, a person can proceed on the presumption that they are following the correct principles unless otherwise proved.

Secondly each of these institutions always remain subject to changes, alterations and modifications. What is mentioned above is based on their current position. If some substantial change takes place in their procedure, the Shariah ruling about them may also change. It is necessary, therefore, that their current position be ascertained each year by consulting a Shariah expert acquainted with such problems.

Contemporary fatawaa


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