The growth of Islamic banking


442a4b85a5477eb21The National Bank of Commerce (NBC) head office in Dar es Salaam. NBC is among the oldest financial institutions in the country that will be competing with Sharia-compliant banks.


“At this time when the world faces financial crisis it is appropriate that such banks should be welcomed since they give interest free loans”

Last year Tanzania witnessed the visit of the investors from Gulf African Bank (GAB) who expressed their desire to operate a full sharia-compliant financial institution in the country. Sharia-compliant accounts operate both in secular and Islamic Banks (IB) like GAB, however the principles of IB are not clear to many especially in this country where such banks do not exist.This system of banking is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics which prohibits interest on loans or deposits.

Available literatures, however, indicate that today more than 250 sharia-compliant banks operating worldwide from China to the United States, managing funds to the tune of 200 billion US dollars. Some western offer sharia-compliant services through designated units in the United Kingdoms, Germany, Switzerland and Luxembourg. In East Africa, Kenya can be cited as one of the vivid examples in which GAB has invested successfully in full sharia-compliant bank and by the end of last year more than 10 branches of such banks had already been opened in the country.

History shows that the first modern experiment with Islamic banking was undertaken in Egypt as the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963 under cover without projecting an Islamic image for fear of being seen as a manifestation of Islamic fundamentalism that was anathema to the political regime. That, in 1975, the Islamic Development Bank was set-up with the mission to provide funding to projects in the member countries. The first modern commercial Islamic bank, Dubai Islamic Bank, opened its doors in 1975.

In the early years, the products offered were basic and strongly founded on conventional banking products, but in the last few years the industry is starting to see strong development in new products and services. Local experts have given their views over the introduction of such bank in the country saying that it is proper and will stiffen competition. The former governor of Bank of Tanzania (BoT), Dr Idrisa Rashid said that there is no any obstacle for such banks to be registered in the country and therefore it can chip in anytime as long as all the registration procedures are observed.

He said that Islamic Banks are just like any other banks and their contribution to the country’s economy will be the same just like any other bank. “It is also a blessing since it will give chance for those who according to their faith do not like to take interests or pay interests from the money that they deposit or borrow from the bank,” he said.Dr Rashid said despite the fact that such banks do not charge interests.

“They do make profit through mortgages, they can buy a car for 10m/- and sell it to you for 15 or 20m/- and then you will be required to pay in installments and there is no interest required,” he explained. He added that the bank can also buy any commodity or house, sell it to a customer at a profitable price and ask him or her to pay in installments under the cost sharing policy and there are no additional penalties for late payment.

“It will be wrong to imagine that at all, they do not make profits, if that was the case then they could not survive and remain competitive in the countries where they exist,” he said.Dr Rashid does not consider the Islamic Bank as a threat to already existing banks because it has also been there in other secular countries and it never threatened the existence of other banks. “It can only stiffen competition in areas like Zanzibar with majority Muslims,” he said.

Another expert, Prof Ibrahim Juma who is the professor of law and the current Chairman of Law Reform Commission of Tanzania (LRCT) commented that fear is there in various countries as the Islamic Banks register a tremendous growth. In his opinion it is a good thing to have such a bank in the country because it will stiffen competition but urged that it should be slowly introduced since it is a new concept in the country.

“At this time when the world faces financial crisis it is appropriate that such banks should be welcomed since they give interest free loans,” he said. Prof Juma said that principles in which sharia-compliant banks operates aim at influencing morality in conducting businesses and therefore he believes that its existence may reduce tendencies of dishonesty and crimes like money laundering.

He said distribution of wealth is one of the core principles of Islamic banks, the principle which is vital in transforming people’s lives. “Since Islamic banking is restricted to Islamic acceptable deals, which exclude those involving alcohol, pork, gambling among others, is so sensitive and its customers should be careful not to involve themselves in such businesses, it is really interesting,” he said.

He, however, cautioned that an Islamic bank should not come with discrimination policy in favour of Muslims because such kind of bank could also attract many Christians who do not like to take or pay interests.He believes that in principle Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah on transactions. Its basic principle is the sharing of profit and loss and the prohibition of usury.







Islamic Banking: a brief historical perspective


Dealing in interest may be prohibited by religion but, contrary to what many many suppose, Islamic Banking is a relatively recent phenomenon having developed over the past 50 years. Modern banking reached Muslim countries at the end of 19th century and early 20th century, primarily through European trading companies which engaged in trade with Muslim merchants and their enterprises. They required banking facilities in Muslim countries to provide the medium for exchange (money!) for trading transactions. Although Muslim traders avoided the use of “foreign banks” for religious and sometime nationalistic reasons, growth of trade did, in time, require them to maintain current accounts and use bank transfers systems. Borrowing and saving with a bank continued to be avoided in order that there was no dealing in interest.

The issue of interest free banking came to the attention of Muslim Intellectuals in the 1940’s and 1950’s. By this time economic and financial influences had produced a number of local and national banks established along the lines of interest based foreign banks. They had started to bring the banking system and its services to the local population. By this time Governments of Muslim countries, particularly those, which gained political independence, had of necessity to engage in international financial transactions using banking systems. The requirement for commercial banking was recognised. The challenge was to avoid the concept of interest within commercial banking. The route to this was the development of the concept of profit and loss sharing (Mudarabha), the key concept from which the structure of most Islamic Banking products and services are derived.


The 1960’s and 1970’s provided the political background and platform by which to attract the attention of Muslim Governmental and National Financial Institutions. Through a number of high profile conferences, where the theory of Islamic Banking was brought to practical application the Islamic Development Bank, an inter-governmental bank was established on strictly interest free banking principles was established, applying the concept of profit and loss sharing to its transactions and activities.

The first interest-free bank, the Dubai Islamic Bank was established in 1975. .A few others followed in Sudan, Egypt and Kuwait in the late 1970’s.Apparently a number of earlier interest free banking ventures were initiated in the 1940’s/50’s and 60’s in a number of Muslim countries but they did not survive or did not survive in strictly Islamic Banking form. Most private Islamic Banking have been established in Muslim countries. However, a number have been established in western Europe and, indeed, a number of well know international banks, such as Citicorp and HSBC have seen the opportunities for the development and provision of Islamic Banking products through selected subsidiaries and branches.

In most countries the establishment of “interest free” banking has been through private initiatives and were confined to that bank. However, in Iran and Pakistan it was lead by government initiative. Outside Pakistan and Iran there are in excess of 50 interest free banks including a number in Western Europe

In Pakistan since 1981 all domestic commercial banks have been permitted to accept deposits on the basis of Profit and Loss Share (PLS). In 1985 the banking system was transformed to between January and July of that year. From July 1985 no banks were able to accept any interest bearing deposits and all existing deposits became subject to PLS rules, though some (few) operations were allowed to continue on the old basis.

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Lending and Borrowing: An Overview

By A.L.M. Abdul Gafoor

Appropriate Technology Foundation

Groningen, The Netherlands

Lending and borrowing between humans has taken place since time immemorial.  People borrowed and returned implements, animals, foodstuff, etc from their friends, neighbors and relations.  They returned the same after use or in the case of foodstuff consumed and returned the equivalent when they came into possession of similar stuff.  When money came into being people borrowed that too and returned.  It was all on the basis of mutual help — the borrower today may be the lender tomorrow and vice versa.  As time progressed professional moneylenders appeared on the scene, and they demanded a “fee” for the use of their money.  This fee is now called interest, but till a few centuries ago it was called usury.  In Islam, interest or usury, which in Arabic is called riba, is prohibited.  Demanding, receiving, paying, witnessing, and anything connected with these activities are all equally prohibited.  There is no controversy over this.  Similar prohibitions exist also in the religious laws of Judaism and Christianity.  Although other religions may not have written laws explicitly prohibiting usury, their followers do eschew the practice of usury. 

1.1  Lending and borrowing: then and now

In earlier times, lending and borrowing was mainly between individuals, and what was meant by usury in these transactions was commonly known and understood.  In money matters, any amount over and above the lent sum was defined as usury or riba.  The ill consequences of usurious lending — the ruination of individuals and families — were witnessed at the local level and therefore the community held the practitioners in contempt.  But the need for capital and loans existed and, in the absence of alternative solutions, the usurious lenders became an indispensable component of the society.  They also exercised invisible power over their clients’ resources.  If the clients happened to be in authority, the power extended to other areas as well; the greater the client’s authority the extensive the power of the lender. 

Kings and nobles needed money to wage war or to live extravagantly.  Moneylenders were happy to oblige, not only for the profit it brought them but also for the privileges and concessions they could extract from their royal clients.  Mining concessions, special trading licenses, tax exemptions, lucrative contracts for public projects, land grants, and personal privileges such as royal titles and appointments to influential positions are just a few examples.  These dealings were carried out discretely and the public was generally ignorant of them.  But the citizens paid the price, one way or another.

The most important concession so extracted was the passing of the Usury Law.  This law introduced an innocuous term called interest and usury was defined as high rate of interest.  Usury was still prohibited, in deference to the Church, but “reasonable” interest was made permissible.  What is reasonable and what is high was to be determined by the parliament!  Now that interest is legal, kings may lose their thrones, soldiers may lose their lives, families may lose their livelihoods, but the country must pay its debts with interest.  Moneylenders extracted their pound of flesh. 

In recent times, presidents and ministers have replaced kings and nobles, and corporate and international financial institutions the individual moneylenders.  The same game, only new names and wider settings.  It is now global, the suffering is universal, and the statistics are in the public domain.  Yet, hardly anyone dares to point the finger at the real culprit — usury, whatever the legal name it may assume.  Neither are the real needs objectively looked at.  Consequently, no meaningful alternatives are offered.

1.2  Lender, borrower and the Church: different goals

Governments, businesses and individuals need money for various purposes.  The methods of catering for these needs must match the purpose for which the money was needed.  A mismatch can lead to disastrous consequences, but this requires much thought and effort.  Borrowing is an attractively easy solution, and this is what the moneylender would recommend for all situations, for it is the most profitable one from his point of view.  When the borrower is impatient or desperate and the only game in town is the moneylender, borrowing from him is the only option and the consequences are inevitable.  To avoid disasters, then, we have to first study the different purposes for which money is needed and then devise methods most appropriate to each purpose.  We have to provide more alternatives.  The moneylender has only one purpose and concern: his profits and benefits.  But the society has more and larger concerns, for it is its responsibility to cater for and protect all its members, individually and as a whole, those living now and those still to come.  In this connection, it is well to remember that all the basic rules, methods, procedures and laws relating to banking and finance were either formulated by the moneylenders themselves or they had a hand in their design and/or execution.

When the usury law was proposed, it was argued that the merchants needed financing, they made profit using the borrowed funds and, therefore, they had the ability to pay the financiers a portion of that profit.  Very reasonable.  The trouble was, once the law was passed, it was applied to all situations — whether the borrowed funds brought about a profit or not.  The Church had become too weak but still dogmatic, and the merchants and moneylenders too strong.  The Church could not grasp the new need, brought about by the increased trade in Europe, and failed to provide an appropriate solution.  Nor could it argue successfully to limit the application of the new law to trade financing only.  Neither did it demand that the law should not be applied to non-profit-creating loans intended for basic consumption needs.  It seems that the Church granted the moneylenders a blank cheque on a platter, by default — by its all‑or‑nothing insistence on a complete prohibition and by failing in this dogmatic stance.

1.3  Islamic approach: different consequences

In Islam, the situation was different.  First, from the beginning of the history of Islam in the seventh century, the (large-scale) merchants’ need for (additional) funds was fully recognized and provided for.  There were two ways in which a merchant could finance his trade.  One: two or more merchants could pool their funds together and conduct the business together and share the profit or loss according to their (financial) contribution.  This was called musharaka, similar to the present-day partnership company.  Two: a merchant could obtain his funds from one or more financiers and share the profit with his financiers in an agreed proportion.  But he has full freedom in the conduct of his business, and any genuine financial loss must be borne entirely by the financiers.  This was called mudaraba, similar to the present-day shareholder companies.

Consequently, while the riba-prohibition of Islam related to all lending and borrowing operations, it took special note of the financing needs of traders and businessmen as well as the investment and income generation needs of those who possessed extra funds.  It does not mean that riba is acceptable in these cases; it is prohibited here too.  But a different and equitable solution was already available in Arabia when the Qur’an was revealed; so it approved of it and went onto prohibit riba in all cases.  Therefore, the merchant-need-based and return-on-investment-based arguments of Europe were not relevant or valid in the case of Islam and Muslim lands.  It is necessary to recognise this fact.  That is, the all-embracing usury-prohibition law of the Church and the riba-prohibition law of Islam are not exactly equivalent, despite the similarity of appearances. 

Second, throughout the long history of Islam, Muslim caliphs, kings and nobles have, by and large, kept away from borrowing at interest.  Even though many of them had their share of shortcomings — in common with their counterparts elsewhere — their belief in after-life and the strong words used by the Holy Book against the dealers in riba kept them away from it.  The same applied to all would-be moneylenders as well.  This saved the Muslim masses and the society from many of the ills experienced by other societies, even though this blessing goes generally unrecognised and unappreciated.  Even under colonialism they have enjoyed this benefit.  However, it would be naïve to believe that there existed absolutely no riba-based lending and borrowing, but it certainly was personal, local, small, isolated, discrete and unorganised.

Only in the second half of the twentieth century, especially after many countries became independent, established their own governments, and had to run the affairs of the country on their own, that they began to experience the claws of interest through the banking system.  They needed the banking system because it provided the various services needed by the different sectors of modern society.  But the moneylenders had developed it for their own benefit, based on the all-embracing usury law.  It did not make the differentiation the Qur’an had made.  Muslims had slumbered through the formative years of the modern world, and failed to build on the head start they had and shape a business and banking model to suit modern needs.  Yet their desire to comply with the commandments of their Creator did not die.  Their leaders and intellectuals have awoken to the demands of their constituents, experiments with Islamic banking have begun, but there is still a long road to travel.

1.4  Lending with and without interest

Before we travel further, let us state clearly what we mean by interest and riba and then note the difference between lending/borrowing with and without interest, usury or riba.  Limiting ourselves to monetary dealings only,[1] any benefit demanded or received by a lender in addition to the sum he lent is termed riba.  This would, however, include both monetary and non-monetary benefits.  Interest, on the other hand, would legally limit itself to monetary benefits only.  It is useful not to forget this difference and its significance.

When a person lends without any benefits to himself, he is bound to assess the ability of the borrower to pay back the capital as well as to ensure that the capital is to be used for a purpose that he approves of.  It is also a condition of such borrowing that the lender and the borrower are known to each other or that a reliable mutual friend/relative/acquaintance has introduced them.  In such a situation, there is an unspoken moral/ethical responsibility (and a sense of shame and reluctance, otherwise) in asking, recommending or granting such a loan. 

All these restraints are absent when the lending is done at interest.  The lender assesses only the borrower’s ability to (or the means to) repay the capital and the interest.  A collateral is usually demanded, and by the very nature of interest — its dependence on time — the lender expects that he would eventually be able to acquire the collateral at a favourable price.  Both the interest and the possibility of acquiring property at very low cost drive the moneylender to readily accede to request for loans, as well as to encourage such requests.  Thus, when riba or interest enters the picture, the attitudes of both the lender and the borrower head in a direction directly opposed to the one prevalent in its absence.   This riba-induced change of attitude is remarkable, as are the opposing characteristics of the two attitudes.  One discourages debt, and the other encourages it.  One restrains expenditure on morally or ethically unacceptable items and purposes; the other places no such restrains.  One is open to social control, the other not.  One limits both the size of borrowing and its frequency; the other encourages increase in both.  One encourages short-term loans; the other thrives on long-term arrangements. 

The last two are very interesting.  For since more and larger loans would bring more profit to the lender he would try to acquire more funds.  This eventually led the moneylender to borrow from others at low rates of interest and use the same funds to lend at higher rates, as if it were his own.  The bank’s credit-creation technique was also developed for the same end.  Furthermore, long-term loans provide a stable and steady source of income to the moneylender.  This and the availability of increased funds led the banks to widen their reach and, in recent times, to enter previously untapped areas such as housing finance and student loans.

1.5  Need for money

Let us now examine the need for money in some detail.  To begin with, there are purposes that bring profit, and others that do not.  Within these two categories there are necessary, unnecessary and harmful purposes.  In the modern world one has to also make a difference between the needs of individuals, business organisations and governments.  Let us take them in turn.

1.5.1  Extravaganza and vanity

When the borrowing is for extravaganza or vanity, the borrowed fund produces no profit.  Therefore, if the borrower is unable to repay the loan and interest from his other income sources, the interest would keep on mounting and the moneylender would eventually confiscate the collateral.  All religions and sages throughout the ages have condemned extravaganza and vanity, and have advised against it.  The Qur’an has specifically prohibited spending in vanity.  Here the reference is to one’s spending from his own resources, and the onus is on the individual.  As such, if one engages in such spending using borrowed money, he is seeking his own doom.  Yet, by making the riba-prohibition applicable to both the lender and the borrower, Islam seeks to protect people against their own selves.  If there is no borrower there will be no lender; if there is no lender there will be no borrower.  This closes all doors to doom.  Thus there is no need to find any other solutions to the apparent need of the extravagant.

1.5.2  Housing and education loans

Housing and education are real needs, and therefore their financing deserves close attention.  Building or purchasing a house is obviously a capital acquisition.  So is education, though it does not seem that obvious.  Capital acquisition has always been done using one’s own savings or wealth.  It should continue to be so.  House-owning leads to individual and collective independence.  In turn they add to national wealth and well-being.  This fact is recognised by wise governments and they actively encourage private initiatives.  Free education has produced wonderful results in the twentieth century. 

However, the modern trend, especially in the developed world, is to have them financed by long-term bank loans.  But unlike the loans for commercial purposes these loans produce no immediate profit to the borrower.  Yet, to a moneylender a loan is a loan, and from his point of view these have some attractive advantages, including a secured regular return guaranteed for a long period.  In many developed countries the fiscal laws encourage borrowing and discourage saving/investment/capital acquisition by taxing the interest/dividend received from the latter and granting tax exemption to the interest paid on loans.  These laws enable the banks to price the products very attractively and encourage mortgages, but the subsequent experience of the borrower and the effect on the nation are different. 

For example, a house-owner who bought it on mortgage remains a debtor for practically the rest of his working life and ends up paying several times the original price.  On the other hand, if he fails to pay his instalments on time, he is kicked out as if he were only a tenant.  A student forced to take a loan for his education leaves college/university with a certificate and a millstone round his neck.  He may become a government administrator, business executive, politician or any other, but he is still a bonded man.  And a bonded person cannot think or act independently.  Anyone whose parents are too poor or unwilling to pay for his education, and himself refuses to be bonded, is denied higher education.  It is a national tragedy.  These characteristics of housing and education set them apart from other needs. Therefore these require special treatment.   

1.5.3  War

Wars, in general, bring only death and destruction to people and property — never any profit.  The winner and the loser are both losers in the end.  If a war is fought by borrowing money at interest, win or lose the country will have to pay the debt with interest, and borrow again to rebuild.  Whether the war was an offensive one or a defensive one, in the end, only the moneylenders celebrate — on both sides.  Consequently, in history as well as in the present time moneylenders have played an important behind-the-scenes role in both beginning and prolonging wars.  Only a total prohibition of riba on both the lenders and borrowers and its adherence at all levels, especially at the highest levels, could eliminate this factor in the war equation.  Since everyone is a loser in a war, it is in everybody’s interest to avoid any war; eliminating its financing by funds borrowed at interest will go a long way in this effort.  Therefore we need not seek any other solution to this contingency.

1.5.4  Government expenditure

Government expenditure consists of two types: capital and current.  The funds for both are expected to come from taxation.  So a government’s ability to acquire capital goods — to buy equipment and material and to build roads, bridges, schools, hospitals, communication infrastructure, etc — are dependent on, and limited by, the tax revenue.  However, the current expenditure, such as salaries of government officers, supplies and maintenance, has priority over capital expenditure.  Often, like in the case of an individual, little is left over from the tax revenue for capital expenditure.  Consequently, since all capital expenditure cannot be postponed indefinitely, there arises a budget deficit.  A budget deficit is financed by printing money, borrowing, or both.  Printing money leads to inflation, which is a tacit form of taxing the population.  Borrowing increases national debt and interest payment.  Credit creation by banks based on the new money (printed or borrowed) increases inflation even further. Government bonds

Government bonds is one of the instruments used for borrowing money.  Since capital expenditure on infrastructure does not produce any profit, borrowing at interest leads to additional current expenditure in the form of interest payments.  This in turn requires curtailment of other current expenditure or further borrowing.  Government bond is big business, it provides those who have money to spare with a great source of guaranteed return.  But the public debt it creates keeps mounting.  So does the interest on it.  And the inflation generated by money-printing and credit creation add onto the interest rate and lead to further increase of the public debt. 

Thus once a government begins to spend more than its tax income, or fails to tax sufficiently to cover its essential expenditures, it gets into a vicious cycle of borrowing to spend and spending to borrow.  To tax sufficiently the country must produce enough, and taxes are always unpopular.  Borrowing is the easy way out and the country finally ends up in the grip of the moneylenders — national and international — no matter which party or person runs the government.  The debt is open and legally binding but the grip — do this or return the loan, do that or no more loans — is unseen, undeclared and least understood, and hence more hideous.  It is a great mystery, though, that developed countries with very large national debts keep on prospering, while underdeveloped countries with much smaller debt burdens crumble under it.  However, this is no place to probe into that mystery.  Treasury bills

It is a time-honoured practice of any individual to spend on his needs from what he has earned.  If there is no more money left, he either curtails his spending or postpones it till he comes into sufficient funds.  If his income is fixed and regular, such as that of a salaried employee, and he finds himself short of money at the end of the month, he must curtail his expenditure.  Otherwise he will find himself at a worse position next month because his income is not going to increase next month, but the gap would have doubled.  If, instead, he borrows to bridge the gap he will have to borrow the next month and the following month too — an increasing amount every subsequent month.  Eventually he will have to borrow to eat, and pay the loan as soon as he receives the salary and then borrow again for the expenses of the next month.  Suppose he borrows at interest, then he will be bankrupt very soon on account of the interest payments, even though he continued to work and earn.  One could get out of this situation only by earning more or selling some property and paying off all the debts and begin to live within the income and spend only from already earned income.  Or by severely curtailing his expenditure, save and pay off the debts, and by living within one’s means from then on.   

In the case of government current expenditure too, somewhere along the line, they threw away the time-honoured practice of spending from realised earning (collected tax) and began to borrow and spend, expecting to repay when the tax revenue came in.  This committed them to an interest payment cycle.  An instrument called the Treasury Bill was developed for this purpose.  This, in effect, is a three-month loan, interest paid in advance.  The funds are used to pay the current expenditure for the next three months and the loan is paid from the taxes collected at the end of the quarter.  New treasury bills are issued every quarter, month or week.  The cycle goes on.  An elaborate set of financial tools and markets are built around this.  So elaborate that no one remembers when, how or why it started in the first place, or how it keeps perpetuating itself.  It is a given in Finance and Government, and theory and practice have canonised it.  Moneylenders (private individuals, banks, financial institutions, insurance companies, pension funds, etc) thrive on it, and a whole army of professionals service it.  But the general public pays for it, suffers the consequences, and is blissfully unaware of what is happening to it.  Enlightening the public further on this point is not within the purview of this essay.[2]

1.6  Islamic banking confusion

Islamic banking is rooted in the facts that riba is prohibited and trade is permitted, and the profit resulting from trade is permissible income.  By extension, it was argued that interest, which is equated to riba, must be replaced by profit.  To achieve this, lending transactions must be replaced by trading transactions.  This simple concept is religiously applied to all situations.  Where the difference was not clear, legal devices were adopted to dress it up as trade and profit.  One may cheat himself, but can you fool God?  He may be amused by our poor attempts, but does He approve of it?  Whatever God does or does not, others are laughing at us.  Sincerity is supposed to be the bedrock of our relationship with God.  If we are sincere in our efforts to obey His commands, He will certainly show us the right way. 

When the commands were issued 1400 years ago, they were directly understood in the context of the social and economic environment then prevailing, and their application was easily achieved.  Today, the environment has changed and that makes the application seem difficult.  But the solution is not through legal devices, but through our studying and understanding the new environment and sincerely seeking to apply the commands without any adulteration.  Trade and profit have their place, but it is not appropriate for all occasions.  We have to explore other options.  If our intention is sincere, He will certainly guide us to the right solution.

1.7  Solutions

By looking at the needs of society, we can identify three different kinds of needs — investment and finance, banking and loans, and charity — and they each need be handled using a different technique.  Moneylenders offered one solution for all three needs because it was to their advantage, but the society has to cater for larger concerns and therefore must offer more appropriate solutions.  The Qur’an points out these different needs and presents us with different techniques to suit each need.  It is for us to translate them into present-day “language” and set up appropriate institutions.  Outlines of such institutions are presented in another essay (see Meeting the Financial Needs of Muslims: A comprehensive scheme).  Other essays elsewhere expand on these outlines.

Properly dealing with lending and borrowing transactions requires an understanding of the meaning of modern bank interests in relation to usury and riba.  In an essay entitled, Interest, Usury, Riba, and the Operational Costs of a Bank, the history of interest, its relation to usury and riba, the origins of dogmas and theories that prohibit or justify its practice, and the meaning of interest in the modern setting of banking are explored.  It also presents a general model of interest in which several scenarios — from person-to-person lending to modern commercial bank lending — become sub-models.  This enables one to separate riba from the operational costs of a bank and thus to devise a riba-free system of commercial banking that is both viable and compatible with the conventional one.

Inflation has become a fact of life, it erodes the value of capital — depositors’ savings, banks’ loans, cash-in-hand.  It has also been offered as an excuse for charging and accepting interest.  But the main cause of modern-day inflation is not in the short-term supply-demand  pull-push tensions, but in the long-term effects of increased money supply.  The basic cause of this increase is the de-linking of the currency-gold relationship.  It occurred gradually over time, but the final blow was dealt in 1971 when the US dollar was de-linked from gold and the promise to redeem every dollar for 1/35th of an ounce of fine gold was withdrawn, reneging on the Bretton Woods Agreement of 1945.  US dollar was allowed to float (meaning more dollars were printed without the constraint of the 35 dollars per ounce of gold ratio), and the other currencies, which were all linked to gold through the dollar, also started their free-floats, each in its own pace.  Today, at 350 dollars an ounce, gold is ten times more costly.  It is said that the price of gold has gone up; but the reality is that the currency has depreciated that much.  Re-linking all currencies directly to gold, and strictly adhering to the agreed currency-gold ratio, is the proper solution to this problem.  But a global agreement on this is not going to occur anytime soon.  In the meantime savings, loans and cash-in-hand are going to lose their purchasing power.  To neutralise the effect of inflation (due to currency depreciation) on capital, without recourse to increasing the interest rate, a new mechanism is necessary.  Such a mechanism is presented in a book entitled, Commercial Banking in the presence of Inflation.  This mechanism is applicable in person-to-person lending-borrowing transactions as well.  It is straightforward and not difficult to implement.





1.       Emry, Pastor Sheldon, Billions for the Bankers – Debts for the People.  Free distribution booklet, undated.  Also available at:, and downloadable from: Billions.exe.

2.       Gafoor, A.L.M. Abdul, Commercial Banking in the presence of Inflation.  Groningen, the Netherlands: Apptec Publications, 1999.  Published in Malaysia by A.S. Noordeen, Kuala Lumpur.

3.       ……….., Interest, Usury, Riba, and the Operational Costs of a Bank.  Article available at the author’s websites: and

4.       ……….., Meeting the Financial Needs of Muslims: A comprehensive scheme.  Article available at the author’s websites: and