Banking

Victor

Would I have it right that a debit card (where you have money in the bank) is OK under Islamic rules, but a credit card isn't as it is essentially a loan?

BuffyBot

Pretty much, although it's the paying on interest that is prohibited rather than a credit card itself - so I guess a credit card could be held if the balance was paid off in full every month and interest is avoided

hivizman

It's theoretically possible to set up an 'Islamic credit card' based on a Shari'ah-compliant contract called Bai Bithaman Ajil. This is a type of deferred sale arrangement, where the card provider is considered to buy the goods or services at a given price less a discount from the supplier and to sell them on to the customer at the given transaction price, payment of which is deferred. This is economically equivalent to a standard credit card arrangement where the card provider pays the supplier an amount equal to the face value of the transaction less a handling charge. I understand that several banks in the Middle East and South East Asia offer such cards.

For a conventional credit card, there is a scholarly view that it is not acceptable to enter into the basic card agreement, even if you intend to pay the balance off in full every month, because the card agreement specifies that interest is chargeable in certain circumstances (and you can't guarantee in advance that you'll never be charged interest). The authority for this is a hadith given by Imam Muslim (Book 10, No. 3881 - USC-MSA Compendium of Muslim Texts):

Jabir said that Allah's Messenger (may peace be upon him) cursed the accepter of interest and its payer, and one who records it, and the two witnesses, and he said: They are all equal.

On the other hand, I have read (but don't have an authority) that it is acceptable to have a conventional credit card so long as you have the intention to operate it in a way that will mean that you will never pay interest.

Victor

hivizman wrote: »

It's theoretically possible to set up an 'Islamic credit card' based on a Shari'ah-compliant contract called Bai Bithaman Ajil. This is a type of deferred sale arrangement, where the card provider is considered to buy the goods or services at a given price less a discount from the supplier and to sell them on to the customer at the given transaction price, payment of which is deferred.

But I though you weren't allowed owe people money either? That credit was usually given by means of a joint investment or such like.

hivizman

Victor wrote: »

But I though you weren't allowed owe people money either? That credit was usually given by means of a joint investment or such like.

There's no prohibition on borrowing or lending money, or other items, just paying interest. There are several verses in the Qur'an (for example Surah Al-Baqarah 2:245), where making charitable gifts is equated with making a loan to God:

Who is he that will loan to Allah a beautiful loan, which Allah will double unto his credit and multiply many times? It is Allah that giveth (you) want or plenty, and to Him shall be your return.

There is a Shari'ah-compliant type of loan known as Qard Hasan, literally "beautiful loan". There's a description of Qard Hasan here, which emphasises that Qard Hasan is an act of benevolence to someone in need of funds, who could use borrowed money to do something that would provide an opportunity to repay in the future. A particular example would be a loan to allow someone to study, in the expecation that the borrower would be able to repay the loan out of future earnings.

According to an authoritative source on Islamic banking (Nabil A. Saleh Unlawful Gain and Legitimate Profit in Islamic Law: Riba, Gharar and Islamic Banking, 2nd ed., London: Graham & Trotman, 1992), the various Madhhabs (schools of jurisprudence) consider that any agreement on the part of the borrower to repay more than the amount of the Qard Hasan is unlawful riba (interest). However, it is permissible for the borrower to make a gift to the lender after the loan is repaid, so long as there is no contractual expectation.

I don't think, though, that Qard Hasan would be appropriate for a credit card arrangement. And you are certainly correct that Islamic finance should involve the financier in taking on some element of risk through a profit and loss-sharing arrangement (of which there are various acceptable structures). The Qard Hasan is regarded not so much as a commercial transaction as one in which better-off members of the community support those in need, in a way that encourages them to develop their own means of making a living.

hivizman

An interesting comment on the attitude to loans in traditional Islamic jurisprudence appears in the book Islamic Finance: Law, Economics, and Practice (Cambridge University Press: 2006) by Mahmoud El-Gamal, who is Professor of Islamic Economics, Finance and Management at Rice University in Houston, Texas. He writes:

The Prophet's companions and early jurists said that they preferred to lend a coin, have it repaid, and lend it again, rather than to give it away in charity. Goodly loans have direct charity built in, as a needy debtor would be absolved if he cannot pay. On the other hand, a needy borrower retains dignity relative to recipients of explicit charity, through the possibility of repaying the principal. Even in case of repayment, the lender gains religious credit through sacrificing the time value of his property, and proving his willingness to sacrifice the property itself if necessary. Hence, Islamic jurisprudence excluded lending from the arena of finance, to retain its goodly charitable nature. This is possible since all the financial ends that can be served through commercial lending can be equally if not better served through other forms of commutative contracts (such as sales, leases, and the like).

So the normal position is indeed that you shouldn't owe people money (or to be more precise, you shouldn't borrow money), though people in need should be able to borrow free of interest, as wealthier members of the Muslim community provide financial support for poorer members. Hence the profit-and-loss-sharing mudarabah arrangement is preferred to debt financing for investment opportunities, while house purchase is structured as joint ownership of the property, with the purchaser paying rent to the provider of finance relating to its share of the property and gradually buying the financier's share. The tricky case relates to the deferred sale structure of murabahah or bai bithaman ajil, where the provider of finance buys something on behalf of a customer, the customer takes delivery, but pays for the item at a later date (or dates). The provider of finance charges a higher price to the customer than the amount paid to the supplier. In this arrangement, the customer owes money but technically hasn't borrowed anything (since the money to pay the supplier goes directly from the provider of finance to the supplier). The customer's obligation is thus a trade debt rather than borrowing. [I've got to admit that I don't find this very convincing - probably that's the result of starting from a Western rather than an Islamic mind-set].

Victor

hivizman wrote: »

There's no prohibition on borrowing or lending money, or other items, just paying interest.

Phew!

I loaned a few euros to a guy I know (I'm Christian, he's Muslim) for bus fares. Not thinking, a few weeks later I asked jokingly "Hey, wheres my money?". He looked at me in a panicked state and ran off to get the money and was not so much thankful (he was) as apologetic. I felt bad that he felt bad and was wondering if the loan part was a problem.

hivizman

I suspect that your friend just felt bad because he'd forgotten to pay you back.

I remembered the verse in Surah Al-Baqarah (2:177) in the Qur'an that says "It is righteousness . . . to fulfil the contracts which ye have made", but then I had a mental panic that this applied only to contracts between Muslims. Certainly there are some suggestions on the internet that the Qur'an permits Muslims to break their contracts with non-Muslims, but the verse quoted (Surah Al-Tawbah 9:3 "And an announcement from Allah and His Messenger, to the people (assembled) on the day of the Great Pilgrimage - that Allah and His Messenger dissolve (treaty) obligations with the Pagans") does not on my reading imply that Muslims are at liberty to break agreements with non-Muslims whenever they want.

Actually, lending a friend in need some money for bus fares would be a good example of Qard Hasan, the beautiful loan.

studiorat

Plato and Aristotle said interest was against nature.

The Catholic Church said usury was a sin until sometime in the 18th Century. At one stage even to say charging interest was not a sin was heresy, and could be dealt with accordingly. That law was chipped away at for centuries.

Banking etc. in the cities was conducted by Jews, who had no such rules apparently. And they were encouraged to set up business to service the merchant trade. Probably one of the reasons for that particular stereotype.

On a personal note I've always felt that using money to make money without actually doing any work was always a bit dodgy.

hivizman

The specific injunction in Deuteronomy 23:19-20 reads (NRSV Anglicized Ed.):

You shall not charge interest on loans to another Israelite, interest on money, interest on provisions, interest on anything that is lent. On loans to a foreigner you may charge interest, but on loans to another Israelite you may not charge interest, so that the LORD your God may bless you in all your undertakings in the land that you are about to enter and possess.

In the Middle Ages in Europe, Jews were barred from most occupations (kept out of guilds, etc.), and so moneylending was about the only thing they could do. Because Christians were forbidden from lending money to each other and charging interest, but Jews could charge interest to non-Jews, there was a ready market for Jewish moneylenders (who could always be expelled if borrowers didn't want to repay them).

In the Muslim world at this time, Jews had much more economic freedom, being regarded as "People of the Book" along with Christians. Much of our knowledge of Middle Eastern social and economic history around the 11th and 12th centuries comes from records of Jewish merchants that survived in a synagogue in Cairo. These records, and other surviving documents, form the basis of important studies such as S. D. Goitein's 5-volume study A Mediterranean Society: The Jewish Communities of the Arab World as Portrayed in the Documents of the Cairo Geniza (1967 - see also this note for some background on Goitein), and A. L. Udovitch's Partnership and Profit in Mediaeval Islam (1970). Udovitch wrote a paper in 1980 called "Bankers without banks: commerce, banking, and society in the Islamic world of the Middle Ages", which is widely cited (and provides a good way into a lot of material on Islamic finance available on-line).

hivizman

On the theme of Islamic financial services, yesterday the first British provider of Shari'ah-compliant insurance (Takaful) commenced business. Trading as Salaam Halal Insurance, the company is offering car insurance to begin with and will offer home insurance at a later date. More details can be found here. This product is explicitly stated not to be available in Northern Ireland, and would certainly not be available outside Great Britain. On the other hand, the product is being marketed not just to Muslims but also as a form of "ethical insurance" of interest to non-Muslims.

Apparently, conventional insurance is considered to be haram (forbidden to Muslims), because insurance contracts are considered to involve gambling, excessive uncertainty and riba (which doesn't just cover interest but also includes any form of exchange of a sum of money (the insurance premium) for the possibility of a greater sum (the settlement of a claim). Some modern Islamic scholars do not agree with this analysis, arguing that modern insurance, based on actuarial statistics, minimises any unacceptable element of gambling and uncertainty. However, other scholars still uphold the claim that insurance is haram (thus underpinning the need for Shari'ah-compliant insurance products).

Takaful, the halal form of insurance, involves a mutual pooling of risks through some form of cooperative arrangement. Individuals contribute the equivalent of insurance premiums to a fund, which is invested in Shari'ah-compliant investments (so not put on deposit with a bank earning interest). Claims are met out of the fund, and any balance at the end of the year is returned to the members of the Takaful pool (Salaam Insurance proposes to apply any balance as a discount on renewal premiums). The basic principle is one of mutual help and sacrifice.

As so often happens in Islamic finance, it's difficult to see how a Takaful arrangement is different from a conventional mutual insurance fund in terms of its economic effects.

donaghs

The term "usury" is defined by some as charging "excessive interest". Meaning that for Jew and Christians who follow this interpretation, interest is not necessarily an issue.

I recall the same ideas apply to Riba in Islam.

Like all things with religions, there are grey area and interpretations. And others who will say they are the only ones who are right, etc. Yet one more reason for sectarian disputes!;)

hivizman

The Arabic word riba has the principal meaning "addition" or "increase". Translators of the Qur'an tend to translate riba as "usury", but this English word nowadays implies excessive and extortionate interest. Interestingly, Abdullah Yusuf Ali translates riba as "increase" in Surah Ar-Rum 30:39 but as "usury" in Surah Al-Baqarah 2:275. The earlier verse (30:39) was, it is claimed, revealed around 615CE whereas the later verse (2:275), which is usually quoted as the principal Qur'anic prohibition of riba, was, it is claimed, one of the last verses revealed, in 632CE. The earlier verse contrasts the futility, in terms of gaining God's pleasure, of lending at interest with the fruitfulness of giving charity:

That which ye lay out for increase through the property of (other) people, will have no increase with Allah: but that which ye lay out for charity, seeking the Countenance of Allah, (will increase): it is these who will get a recompense multiplied.

[Yusuf Ali Translation of Meaning of Qur'an]

As Yusuf Ali notes "Riba (literally 'usury' or 'interest') is prohibited, for the principle is that any profit which we should seek should be through our own exertions and at our own expense, not through exploiting other people or at their expense, however we may wrap up the process in the specious phraseology of high finance or City jargon."

However, some modern commentators argue that the prohibition of riba was intended to ban exploitation of the weak (the poor) by the strong (the rich). Apparently, a common form of loan in pre-Qur'anic Arabia was to advance a sum of money, and if the borrower was unable to repay that sum of money by the due date, then the loan would be "rolled over" but the amount now due would be doubled. This is referred to in Surah Al-Imran 3:130:

O ye who believe! Devour not Usury, doubled and multiplied, but fear Allah: that ye may (really) prosper.

[Yusuf Ali Translation of Meaning of Qur'an]

On this basis, it is argued that most modern loans do not involve economic exploitation, and hence do not involve riba. I have on my desk at the moment a short book by Muhammad Saleem Islamic Banking - A $300 Billion Deception (2005), which makes this argument, and there are other more scholarly sources in favour of the view that riba should be understood as referring to unjust and exploitative payments required from borrowers (so it would cover excessive fees and charges as well as excessive interest), but not to modern commercial interest.

However, as I've already mentioned in an earlier post, this view would undermine the market for Islamic finance. No bank would accept that its interest charges were exploitative (if the rate charged is high, then the bank would defend this by arguing that it reflected the risk characteristics of the borrower), so understanding riba as applying only to exploitative interest and charges would mean that no bank deals in riba. So Islamic finance needs to argue that riba means any interest to justify its existence.

That said, the methods used to construct Shari'ah-compliant financial structures and instruments sometimes seem to involve as much "specious phraseology" as Abdullah Yusuf Ali suggested was prevalent in more conventional high finance.

larryone

So wherre do mortgages fit in here?
Can a muslim get a mortgage for buying a house and keep his conscience clear?
The repayments would mean paying interest, right?


Edit: just searched the forum for "mortgage", there are a few threads that deal with this...

hivizman

larryone wrote: »

So wherre do mortgages fit in here?
Can a muslim get a mortgage for buying a house and keep his conscience clear?
The repayments would mean paying interest, right?


Edit: just searched the forum for "mortgage", there are a few threads that deal with this...

You probably got this one, then.

Instead of "mortgage", a neutral term such as "home purchase plan" can be used. There are various Shari'ah-compliant (halal) structures, including "diminishing musharaka with ijara". This has two elements. First, "musharaka" is a form of partnership between the home purchaser and the provider of finance (say a bank). The home is purchased by the partnership, with the shares reflecting the amount of the deposit contributed by the purchaser (for example, a purchaser putting up a 20% deposit would begin with a 20% share of the partnership). Second, "ijara" is a lease of the home by the purchaser from the partnership. The purchaser pays rent each month to the partnership. Some of this rent is applied to buy a portion of the bank's share in the partnership, and the rest goes to the bank as its return. At the end of the agreement, the purchaser has completely bought out the bank's share of the partnership and the home belongs to the purchaser absolutely.

This is halal because paying rent for the use of assets is permissible, and it is also permissible to deal in shares of a partnership that owns an underlying real asset. The calculation of the rent for a given period is usually based on some benchmark such as a bank interest base rate or London Inter-Bank Offered Rate (LIBOR) plus a margin, so it looks like interest (and would be treated as interest for tax purposes), but the Islamic scholars argue that using an external interest rate as the basis for fixing rent doesn't turn the rent into interest.

Accountants often use the concept of "substance over form" when analysing transactions, and they would describe the halal home purchase plan as a mortgage in economic substance (because the cash flows and the various rights and obligations are economically virtually the same as a standard mortgage). However, in the USA some Muslims have turned this argument on its head. I've recently read a book Pious Property: Islamic Mortgages in the United States by Bill Maurer (New York: Russell Sage Foundation, 2006). Maurer is a social anthropologist who is interested in unusual economic structures. He found that, in the USA, Islamic home purchase finance is set up legally as standard mortgages, using the standard documentation approved by mortgage underwriters such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), but with a side agreement that "translates" the documentation into a halal structure. So in this case the legal form is that of a standard mortgage, with interest, but the "Islamic substance" is Shari'ah-compliant.

But basically, you and I may say "interest", a Muslim may say "rent", and we would both be paying the same amount to the bank.

Victor

I think the reaction to insurance is overdone - it is not gambling - you can't make money from insurance (unless there is fraud). Insurance is about putting you back where you were before the event and while not quite charitable, it is a reasonably fair sharing of risks.

hivizman wrote: »

This is halal because paying rent for the use of assets is permissible, and it is also permissible to deal in shares of a partnership that owns an underlying real asset. The calculation of the rent for a given period is usually based on some benchmark such as a bank interest base rate or London Inter-Bank Offered Rate (LIBOR) plus a margin, so it looks like interest (and would be treated as interest for tax purposes), but the Islamic scholars argue that using an external interest rate as the basis for fixing rent doesn't turn the rent into interest.

Of course, typical mortgages vary from country to country. In Europe, the interest rate tends to be fixed for the duration and is the further from interst as it can be determined externally and not related directly to interest rates (although a bank may look at it from that direction when they are considering "Is this a good deal for us?"). In Ireland, the UK and North America rates tend to be variable.

Accountants often use the concept of "substance over form" when analysing transactions, and they would describe the halal home purchase plan as a mortgage in economic substance (because the cash flows and the various rights and obligations are economically virtually the same as a standard mortgage). However, in the USA some Muslims have turned this argument on its head. I've recently read a book Pious Property: Islamic Mortgages in the United States by Bill Maurer (New York: Russell Sage Foundation, 2006). Maurer is a social anthropologist who is interested in unusual economic structures. He found that, in the USA, Islamic home purchase finance is set up legally as standard mortgages, using the standard documentation approved by mortgage underwriters such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), but with a side agreement that "translates" the documentation into a halal structure. So in this case the legal form is that of a standard mortgage, with interest, but the "Islamic substance" is Shari'ah-compliant.

Mortgages in the USA are quite different to those here. Here, banks are immensly reluctant to repossess the property and tend to be happy if they are getting osme money in every month and the difference between loan and asset value isn't a problem. If a property is reposessed, the proceeeds are applied fairly, although the bank is likely to have racked up legal costs and these have to be paid. The debt follows the person, not the property.

In the USA, the banks are willing to reposess after only a few missed payments and will sell, even at rediculously low prices. However, the entire debt is cleared - the debt follows the property, not the person.