Why Islamic Banks formed

AN INTRODUCTION

The Prophet said: “There will come a time for men when no one will be anxious about profits, whether lawful or unlawful” Bukhârî, Ventes (34), bâb 7.

One of the aspects of the Islamic renewal is the growing importance of Islamic banking organizations in economic life. With the oil boom, Arab states found themselves with a surplus of petro-dollars which had to be invested somewhere, and at the end of the 1970’s this situation led private groups as well as, occasionally, state enterprises to set up financial institutions in accordance with the spirit of Islam. Hence arose a whole host of banks proclaiming their adherence to the sharî’a and seeking to attract the new capital. Countries like Iran and Pakistan even Islamized the whole of their banking system, both for religious motives and also to show their disapproval of Western capitalism. There was even talk of an “Islamic economic theory”. There were international colloquia on the subject and Internet sites blossomed. There is already a substantial literature on this subject. Because of its topicality, it may be useful to try and examine the subject in greater depth. One can however deal here only with the essential problem. We shall look first at the ban on usury in the Koran and in the tradition, and then at juridical developments. Then we shall consider the different juridical attitudes in different Muslim countries.

Usury in the Koran

We must of course seek in the Koran the initial reason for the condemnation of the taking of interest. The root ribâ means “increase”. The word ribâ in the sense of usury is only found in four Koranic passages. We may study them in chronological order.

 

The first is in surat 30 (al-Rûm), dating from the third Meccan period, shortly the reform before Hegira. “What you lend at interest (ribâ) for the sake of increasing (li-yarbuwa) your property will bring you no increase (lâ yarbû) in the sight of God, while what you give away as alms (zakât) in seeking the face of God will bring many times its value.” (Q. 30, 39)

 

There is not yet an explicit condemnation but only a moral directive according to social justice. This fits the context of the time and place, in which the Muslim community is still a small minority in a society in which commerce recognizes no moral rules and in which usury is a widespread practice. The three other passages are all from the same period and probably date from a few years after the installation in Medina. Following the order established by J. Schacht , we be gin with the verse 3, 130: “Do not practice (literally “eat”) usury by multiplying capital beyond due measure.”

 

Here is the first formal prohibition. It may well have been addressed in the first place to the Jewish community of Medina, well-known for its financial practices. It seems to be aimed at a particular form of usury, later called ribâ al-jâhiliyya (pre-Islamic usury), according to which if a debt was not repaid at the proper time the amount due was increased.

 

Here next is a long passage from the surat al-Baqara : “Those who feed on usury will only rise again (on the last day), like those possessed by the devil. They say in effect, usury and selling are the same thing, whereas God permits selling but forbids usury… God will reduce interest to dust while making alms fruitful…O you believers, fear God, and renounce the excess of usurious interest, if you really believe. If you do not follow this ruling, you may expect the hostility of God and of his Messenger. If you repent, you will retain your capital, neither harming anyone else nor suffering harm yourselves. To a debtor in difficulty, grant a delay until his situation improves. And if you renounce your rights that will be better still.” (Q.2, 275-280).5

 

This is a fundamental passage for our present reflection. One may list the following points

  • The clear distinction between commerce and ribâ;

  • Ribâ is condemned by God, while on the other hand he encourages almsgiving;

  • Faith implies the renunciation of usury;

  • Nevertheless, capital will be safeguarded;

  • Further, one may not put pressure on people who are in difficulties. There is a final, third passage whose context suggests that it is also addressed to the Jews. It confirms the preceding prohibitions.

 

 

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