We Don’t Go to Bars, Why Do We Go to Banks?

By Douglas Kelly

Part I | Part II

3208910866_ed76d36d8a_bWhen I recently consolidated a student loan I had taken out many years ago, I noticed that the amount I owed was more than double what I had originally borrowed.  I’m still in school, so I don’t have double the education from when I first took out the loan.  I definitely don’t have double the income.  Even before I knew anything about Islam and how it forbids usury, I knew something was wrong with that picture.  And that there was a bigger picture involving a whole world in debt crisis.

I had a “eureka” moment when I first read the warnings in the Qur’an and Sunnah about usury.  The logical connection I made between those warnings and the global economic crisis can only be described in terms as simple as a children’s adventure story—lest they go right over all our heads like so many complex derivatives transactions and we as an Ummah fail to make the one simple transaction that might finally begin to change our condition in the world.

Like “putting two and two together,” it’s as if I had been walking around my entire life with the broken half of a ring inscribed with a secret message that couldn’t be read without the other half.  The first half of the message of that ring was my experience on Wall Street.  The missing half, the key to the secret, I finally found a generation later in the Word of Allah (subhana wa ta’ala – exalted is He) as revealed to the Prophet Muhammad ﷺ.

I am neither a scholar nor an Imam.  I only embraced Islam, and read the English translation of the meaning of the Qur’an for the first time four years ago.  I can only recite 13 surahs (chapters) from memory, and I am still both a student of the Islamic  financial  system and a student of the Deen of Allah (swt).  But 20 years ago I was an NASD-registered stockbroker with an investment banking firm known for its IPOs (Initial Public Offerings).  I have sold life insurance and annuities and bought investment properties.  And I had a front-row seat for an economic crisis that wiped out the value of a portfolio of prime real estate I took a decade to build, which in January 2006 appraised at 1.2 million US dollars.  I know first-hand how banks operate.  And it’s nothing like what the Prophet Muhammad ﷺ said that Allah (swt) prescribed for mankind.

The prohibition of interest and the laws of halal trade and lending that Allah (swt) revealed in the Hadith, as well as in the Qur’an itself, appear to me to describe a system of shared profit and loss between lenders and borrowers.  A system that looks a lot like what we know today as Investment Banking of common shares of stock.

The foundation of Wall Street, and every financial market on the planet, is the principle of risk is proportionate with reward.  Just like, “In God We Trust,” the very words “risk is proportionate with reward” imply a leap of faith.  The entire world does business according to this un-provable, unscientific law of sowing and reaping.  You cast thy bread upon the waters of commerce with the understanding that thy bread may never return; or that it may come back multiplied many times over—like a handful of loaves and fishes that end up feeding the multitudes.  The greater the chance of loss, the greater the potential profit.  The more you can afford to lose, the more you stand to gain.  Just like in life, nothing is guaranteed but death.

The first law of becoming a licensed securities broker in America is you may never tell a client, “I guarantee.”  Every piece of sales literature of every type of regulated investment product sold in the US must include the language, “Investing Involves Risk,” along with, in some cases, “…Including the Risk of Loss of Principal.”  The idea that an investor may lose his or her entire investment—or may profit handsomely—is what makes a market.

Stocks, as well as bonds, are considered staples of a diversified investment portfolio.  But while stocks represent a share in the profits and losses of a business enterprise, bonds are interest-bearing loans “guaranteed” by the borrower, or “guarantor.”  Bondholders are the first in line to receive the proceeds of a company in liquidation, while stockholders are the last in line and may receive nothing at all.

So who can guarantee a “guaranteed investment?”

During the time of the Prophet Muhammad ﷺ, most people were self-employed.  People raised crops or livestock,  fished the seas, made clothing or textiles by hand or transported the goods of others by ship or caravan.  They brought their produce or their hand-made goods to the marketplace to barter for other goods, or to sell for money.  Those blessed with an abundance of money could then finance the businesses of others.  Among the many societal wrongs the Prophet ﷺ was sent to  rectify was the deceitful way in which some businesses were being conducted—and the unfair way in which money was being leant.  We all know trade is halal and usury is haram, but do we know why?

Allah (swt) said in the Qur’an:

“Those who swallow down usury cannot arise except as one whom Shaitan has prostrated by (his) touch does rise.  That is because they say, trading is only like usury; and Allah has allowed trading and forbidden usury.  To whomsoever then the admonition has come from his Lord, then he desists, he shall have what has already passed, and his affair is in the hands of Allah; and whoever returns (to it)—these are the inmates of the fire; they shall abide in it.” (2:275)

“Allah does not bless usury, and He causes charitable deeds to prosper, and Allah does not love any ungrateful sinner.” (2:276)

“O you who believe! Be careful of (your duty to) Allah and relinquish what remains (due) from usury, if you are believers.”  (2:278)

“O you who believe! Do not devour usury, making it double and redouble, and be careful of (your duty to) Allah, that you may be successful.”  (3:130)

“And their taking usury, though indeed they were forbidden it, and their devouring the property of people falsely, and We have prepared for the unbelievers from among them a painful chastisement.”  (4:161)

The Prophet Muhammad ﷺ said:

“Gold is to be paid by gold, silver by silver, wheat by wheat, barley by barley, dates by dates and salt by salt, like for like, payment being made on the spot. If anyone gives more or asks for more, he has dealt in usury. The receiver and the giver are equally guilty.”  (Muslim)

“A time is coming to mankind when only the receiver of usury will remain and if he does not receive it, some of its dust will reach him.”  (Ahmad, Abu Dawud, Nasai, Ibn Majah).

“When a man makes a loan to another, he must not accept a present.” (Bukhari)

“A dirham which a man knowingly receives in usury is more serious (a crime) than thirty-six acts of fornication.”  (Ahmad, Daraqutni)

Here in the US, most people with incomes have a bank account or at least some relationship with a financial institution.  We cash our paychecks, pay our bills, save our money and finance our purchases through banks.  Banks that make most of their money off interest which, according to the Qur’an and Sunnah, is as haram as pork, alcohol, gambling and even fornication!

In his book An Introduction to Islamic Finance (2002), Justice Muhammad T. Usmani describes the difference between profit-based share investments (like stocks) and interest-bearing loans (like bonds):

“Interest predetermines a fixed rate of return on a loan advanced by the financier irrespective of the profit earned or loss suffered by the debtor, while [shares of stock] do not envisage a fixed rate of return.  Rather, the return [on shares of stock] is based on the actual profit earned by the [business].  The financier in an interest-bearing loan cannot suffer loss while the financier of a [company’s stock] can suffer loss, if the [business] fails to produce fruits.  Islam has termed interest as an unjust instrument of financing because it results in injustice either to the creditor or to the debtor.  If the debtor suffers a loss, it is unjust on the part of the creditor to claim a fixed rate of return; and if the debtor earns a very high rate of profit, it is injustice to the creditor to give him only a small proportion of the profit, leaving the rest for the debtor.

“…In this way, the rate of interest is the main cause for imbalances in the system of distribution, which has a constant tendency in favour of the rich and against the interests of the poor.”

Of course, Islamic Finance exists for those with access to it.  Shari`ah-compliant investment products are available in Muslim and even some non-Muslim countries.  Even countries as westernized and interest-based as the UK have Islamic banks, or traditional banks with Islamic Finance divisions.  The problem is, we’re not using them to the extent where they could do us any good.  We may eat halal, but we bank haram.  We put all our money in regular banks, then wonder why we struggle to get business loans, student loans, home loans and credit cards—and struggle even harder to pay them off in a bad economy.  I urge everyone to read The Case Against Interest by Abu Ubaydah Andrew Booso, which is not only a brilliant, detailed discussion of both the historic and current consequences of interest, but it’s a large part of what inspired me to write this post.

My intention is not merely to re-hash Br. Abu Ubaydah’s powerful argument against usury and the way in which it attempts to “create” money from nothing.  With Allah’s help, I also want to offer a simple, common-sense way to implement the solution in his concluding paragraph:

“Indeed, the current crisis should be a deep warning to theorists of Islamic economics to show high aspiration to develop leading theories and practices for all people, rather than continuing to play a limited role for a niche market, whilst the majority of people face the inequities of the current system. Such brave theorising and practice might mean also challenging some other religiously believed tenets of conventional economics, such as money creation and paper money.”

The problem is not whether Muslims have Islamic Banks in the countries where we live.  The problem is whether we understand that if we don’t, we need to start building them—with at least as much urgency as we devote to building new  masajid—as if our lives depend on it.  Considering (1) the consequences that Allah (swt) makes clear for those who deal in usury, and (2) the consequences already facing the millions of people who have lost everything to a global economy addicted to usury; our entire future, in this world as well as in the Hereafter, is  at stake.

It’s no secret that those of us with businesses need capital, those of us in school need student loans and those of us with jobs can’t always pay cash for a car or a home.  So where does our money come from?  It starts with Allah (swt) creating something from nothing:

“And He it is Who sends down water from the cloud, then We bring forth with it buds of all (plants), then We bring forth from it green (foliage) from which We produce grain piled up (in the ear); and of the palm-tree, of the sheaths of it, come forth clusters (of dates) within reach, and gardens of grapes and olives and pomegranates, alike and unlike; behold the fruit of it when it yields the fruit and the ripening of it; most surely there are signs in this for a people who believe.” (6:99)

One need not be an economist to know that a nation’s economy exists because it grows crops, or raises livestock, or catches fish, or mines for metals or precious stones, or drills for oil or natural gas, or manufactures goods, or builds structures, or harnesses energy from the sun, wind, water or nuclear power, or provides professional services such as medicine, law, education, tourism, hospitality, etc.  Allah (swt) provides us with the knowledge and the resources and we then go out into the land and use what we learn to develop what we’ve been given. Of course, it takes labor to farm, fish, explore, manufacture, build, etc.  Unless you’re going to enslave people and force them to work, you have to pay them.  Once investors invest capital in a business, that business can then pay people to do work.  I’ll leave for another debate the ethics (and economics) of pay vs. profits, and how some businesses profit enormously by squeezing as much productivity as possible out of as few workers as possible.  Capital puts people to work producing the goods and services people need and want, and when people have enough income to buy those goods and services, an economy is created.

The moneylenders of ancient times were well aware of these principles of market dynamics and formulated their diabolical scheme accordingly.  The history of usury, which Br. Abu Ubaydah so effectively breaks down, is murky and enigmatic at best, but its destructive effects on society couldn’t get much worse.

In The Case Against Interest, Br. Abu Ubaydah clearly describes how usury, like alchemy, is one of man’s many attempts to create something out of nothing.  As the credit crunch in the US and the debt crises in Europe have demonstrated, you can’t just borrow your way to prosperity.  You have to create real assets by paying people to do real work, so they have enough money to buy (and pay off) the goods and services that keep an economy going.

Those early moneylenders believed that money itself was a commodity to be bought and sold like food or livestock or precious metals.  They created what eventually became a global system of lending that forces the borrower to guarantee his or her repayment, plus interest, regardless of their own success or failure during the life of the loan (of which there is no guarantee).  Those lenders were often unscrupulous men comparable to the loan sharks or payday lenders of today.  They would loan you the money you needed, but whether you succeeded or failed—it didn’t matter.  You had to pay it back at a rate of interest that varied according to their perception of your ability to repay (like a credit score).  Your interest would compound periodically over the life of the loan, so that by the time you paid it back you ended up paying many times what you originally borrowed.  And if you couldn’t pay it back, the lender could legally take everything you owned.  Sound familiar?

What I discovered through the experience of this global financial crisis is that a home, like a commodity, is only worth what someone is willing to pay for it.  If few people are buying homes, because few people can afford them or because few can get approved for them, then simple supply-and-demand dictates that home values will drop.  In a normal market, the demand for housing increases with population growth.  There’s only so much land on which only so many homes can be built.  Therefore, as a population increases, so should the demand for (and thus, the price of) homes.

During the “housing bubble,” that demand was artificially inflated when banks started lending to sub-prime borrowers, and encouraging prime borrowers to treat their homes like ATM machines they could pull money from like a magician pulls a rabbit out of a hat.  Some would argue that the government “forced” them to lend to risky borrowers, but no one ordered banks to make “interest-only” sub-prime loans that started with a low, affordable payment but ballooned to a much higher payment within a few years; nor were they “forced” to lend to people with no income, no job, no assets and no good credit.  And neither were they “forced” to repackage and sell those sub-prime loans to Wall Street.

As record numbers of people became first-time homebuyers, or refinanced their existing homes with these interest-only loans, home prices skyrocketed and homebuilders could barely keep up with demand.  Historically, real estate has almost always appreciated in value, so it was thought that home prices would never go down.  Borrowers (myself included) were told “Get this loan now and in a year you can re-finance into a fixed-rate loan when the value of your home goes up!  Long before the payments go up.”

Meanwhile, the banks would slice and dice these high-interest loans and sell them to investors as high-yield mortgage-backed securities and collateralized debt obligations.  They paid corrupt ratings agencies to give these securities triple-A ratings, which made investors think they were safe investments.  Many of the mutual funds, pension funds and foreign governments that bought these securities had their own internal rules that said they could only put people’s money into A-rated investments.  To make these risky securities an even “safer bet,” Wall Street banks and insurance companies sold credit default swaps, which were like gambling bets that gave investors a payout if borrowers defaulted on the underlying mortgages.  It was like a casino getting a gambler to bet on red and black at the same time.  No one ever imagined the ball would fly off the roulette wheel and land on the floor!

When people’s payments started going up, sometimes doubling or even tripling, many could no longer afford to pay them.  Their incomes were not rising nearly as fast, if at all.  They began defaulting, which began to bring down the value of millions of other homes.  Or, when they tried to re-finance with a new loan, either their credit was bad (from the payments they had missed) or their home was worth less than the amount they had borrowed.  Either way, they were denied.  As more and more people defaulted on their loans, three things began to happen:  (1) the banks had less and less income coming in, (2) home values plummeted as foreclosures rose, and (3) investors started cashing in on those credit default swaps.  No one imagined that so many of those “insurance policy” CDSs would ever be exercised.  As their cash reserves were depleted by the day, banks large and small began failing, one after the other.  The ones who survived or were bailed out by the government began to cut back or stopped lending altogether.   The rest is history.

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  • MashaAllah what a brilliant aritcle.

    SubhanAllah ive seen so many people going into slavery just becasue they cant pay off their debts. Usury is a vicious cycle and it drowns everyone who gets involved in it.

    I stopped using my bank account ages ago. You are so right about one thing, i.e we need tawakkal in Allah subhanahu wa ta’ala- there are always substitutes and ways out of this mess subhanAllah. My father and all his family were bankers all their life but subhanAllah he gave that up for the sake of Allah subhanahu wa ta’ala and now we are doing quite well subhanAllah- jazakAllah khayr for this awesome read mashaAllah.

    May Allah subhanahu wa ta’ala give you all good both in this world and the Hereafter ameen.

    • Salamualaikum,

      @first comment.
      As yasir Qadhi used to say, Where there is a will there is always a way and Fatwa is different and Taqwa is different.
      mash Allah . just today i was speaking to a friend about not using banking accounts for direct deposits and what possible alternatives could it have. if possible please advise how did your family manage to not use banks and what available alternatives were used?

      @author, jazak Allah khayr for the article.
      audhubillah, i got into the situation that to save my status (need to be in continuous state of employment after being out of status for long) in the country, feeling very bad about it and resolving to take next job as soon as possible i had to take a job in a insurance company, the umbrella company of which also is a bank. (Please beware i am not consuming a cent coming from that earning alhamdulillah but need those pay slips to transfer job and all. But still feel very bad about it)

      • “Whosoever of you sees an evil action, let him change it with his hand; and if he is not able to do so, then with his tongue; and if he is not able to do so, then with his heart; and that is the weakest of faith.” (related by Muslim)

        Just as I suggested to the other readers, I have no doubt in my mind that Allah (swt) accepts your intention and is the Best of Knowers of your employment needs. I, too, would like to know what alternatives Sr. Maryam and her family used. Alhamdulillah for their success.

        InshaAllah, you will see in Part II that my ultimate intention is a lofty one–to struggle to get as many Believers as possible to renounce banks the same way we do bars, bacon and betting. I ask Allah (swt) to help me in answering the inevitable question, “So what do we do instead?” Please stay tuned.

      • @ Abu Abdullah + Kelly: JazakAllah Khayr. I stopped working, I volunteer, I dont really need money, cause my dad supports me, i use cash though whenever i have to. But the thing is my dad stopped working in a bank when he found out that his earnings wont be halal through the riba money- all his life he worked in a bank- it was like a legacy y’know – his dad and then him and Allah subhanahu wa ta’ala saved us from it alhamdulilah.

        Unfortunately my family uses banks. Its at least better than not working in one innit? I know, not having a bank account is hard when your supporting a family, like this circular flow of income is drenched in all riba riba riba -but honestly even if i am one day inshaAllah ta’ala- i wil not let riba come to me inshaAllah ta’ala. I trust Him and He will make a way out for me inshaAllah ta’ala. Riba is the worst thing on earth, im riba free alhamdulilah 🙂 lol

        p.s im so glad there’s another part to this subhanAllah 🙂 gonna read that in abit inshaAllah ta’ala.

    • @Maryam: And may Allah (swt) reward you and your family members for their sacrifice in Allah’s way. If you wouldn’t mind, please let us know if you happen to bank with a Shariah-compliant financial institution that is available to US residents (you need not disclose which one), or if you simply pay cash for things and avoid borrowing altogether.

  • I appreciate the detailed explanation of the evils of usury. However, answering the title post, why do we go to banks but not bars, we go to banks because we have to. I can’t just keep cash under my pillow. Some services (like renting a car, hotel, etc.) require you have a bank card or account. So I think scholars from overseas who issue absolute prohibitions on banking are not fully aware of what our situation is here.

    I have a non-interest-taking account. When I asked the teller for that, he looked at me like I was crazy (you don’t want free money?). So I just use the bank to store my money for sake-keeping and to have the card for some services that require it. I feel like I have no choice in this matter, because no “Islamic” bank I know exists in my local. I’m doing my best to minimize the harm. I hope Allah will forgive me.

  • Jazakallah Khayr for a brilliant article. A little editing note however, the indented part where you quote Mufti Taqi Usmani also has a paragraph with your comments on it. It might confuse readers as to whose words those really are.

    • Shukran, Akhi. I’m glad you spotted that. I did, too, but the Editor has been so gracious that I didn’t want to complain about anything. InshaAllah, they will fix it on their own and Allah (swt) will cover my sins on the Day of Judgment.

  • Jazak Allah Khair for this VERY informative article! Now you just need to go on The Daily Show with Jon Stewart and explain to him how the financial crisis happened, because I think he is still confused. I am only 25 and I got myself into quite a bit of debt 🙁 I took a lot of student loans to attend a private college and boy am I regretting it! Not only that I have several credit cards and some with interest rates as high as 29.99%. However I am working hard on paying them off and I ask Allah swt forgiveness for taking part in stupid riba. I was born Muslim but I knew very little about this beautiful deen! I hope InshAllah my younger brothers and sisters won’t make the same mistakes!

  • If I may: I think stopping short of a solution is where the problem lies. Many of us know this, but feel compelled to participate for the reasons Justin mentioned.

    • Thank you. I prayed for guidance in interpreting Qur’an and Hadith as meaningfully as I could. If I said anything wrong, it is from myself. If I said anything right, it is from Allah (swt).

  • Blame whoever you like. Only when people learn to spend less than they earn will they ever be financially free. No loans, no debt and certainly no interest to a bank or anybody for that matter.
    It’s really that simple.

    • Hedge funds operating on 30 to 1 leverage make subprime home borrowers look like fiscal conservatives. Like children mimicking their parents, adults tend to do what they see their leadership doing. People can’t spend more than they earn unless institutions allow it. $30 borrowed for every $1 in working capital enabled a lot of the Wall Street-financed subprime lending that started this crisis.

      My point in writing this article was not to point fingers but to point out how Islamic Finance is to traditional Western banking what Investment Banking is to Fixed Income, or common stock is to bonds. It’s really that simple.

  • I can understand how the west and non-Muslims got into this Riba system. I am just wondering if someone can write a brief article like this to explain how the Muslim world put themselves into the hole of the Riba system. What a mind boggling trick pulled by the shaytan!

    • First, the blame lies in ourselves and the choices we made.
      After that the culprits are IMHO:

      1) Colonialism: One of the ancillary (primary?) effects of colonialism was to put into place a system (economic, political, legal, social, etc.) that continued long after physical occupation ended. It continued because of expedience (who wants to create something from scratch?).

      2) Corrupt leaders: The people we chose to be our leaders (and who were forced upon us be former colonial powers) brought about those systems that benefited themselves and their cronies at the expense of the welfare of the general people.

      3) Inferiority complex: Perhaps as a result of colonialism and a misguided notion that colonizers were more enlightened than us, we simply didn’t think twice about adopting their systems. We felt our principles were inferior (this is easy when you don’t give Islam it’s proper place in your life and think it’s just a set of outdated rituals).

      It’s all maddeningly related. You can’t work on undoing one without working on the others as well.

  • Excellent article maa shaa’ Allah. Just wondering, when you speak about banking, are you referring specifically to interest-related activities, such as opening a savings account or taking out interest-based loans? In other words, are you including checking accounts with no interest accumulation in your definition of “banking”? For those of us who have checking accounts, or bank accounts in which interest is not involved (as Justin stated above), would that really be considered “haram banking”? What is your take on this? Given, banks do earn much of their money through haram interest accumulation, and yes, banks are very corrupt. However, assuming that the person who opens an interest-free checking account with a corrupt bank earns his/her money through a halal means, would this person really be participating in “haram banking”? After all, although the bank itself is participating in haram transactions, this person never did.

    Of course, it is crucial to mention that prominent Islamic jurists deem it permissible to use this kind of interest-free banking through checking accounts, etc. But it is much more clear to me after reading your article, that this is only one opinion. Allah knows best.

    I do apologize if this was beyond the scope of your argument, and if you were only referring to accounts involving interest. Either way, your article opened my mind to these issues which affect our lives everyday. Incontestably, it would be much better and more convenient to have more Islamic banks to turn to for savings accounts, loans, financing homes, etc. May Allah guide us as Muslims to initiate such banking systems and to support others in that enterprise. And may Allah reward you for your contribution to this important subject.

    • As salaam alaikum, Deema, and thank you for your thoughtful commentary. It was not at all beyond the scope of what I was trying to convey, but right on point.

      While my belief is that Allah (swt) is the Best of Knowers of your honest intention to avoid interest, every dollar we as an Ummah keep in non-Islamic institutions, regardless of the type of account, is a dollar being loaned out at interest to someone else. I have no right to make anyone feel guilty for what they may have had no choice in doing.

      All I’m trying to do is raise awareness that we have to start somewhere if we’re ever going to see a day when our local Islamic Bank is as close to home as our Masjid.

  • Salaam, I really enjoyed reading your article. I try to stay riba free as much as i can. Sometimes when i attend parties held by people i know who live on riba, i dont eat anything from their place.

    However my mother does get large amounts of interest on the money she deposits in the bank; i want to know if giving that money to some of our relatives who are under debt is accepted islamically.

    And another question, quite remote from the topic is-I want to know please, if there are any provisons in Islamic company law where the rights of unsecured creditors are protected when a company liquidates?

    Can you help me understand the basis of Islamic company law please? Do we have any concept of a separate legal identity of the members of the company and the company itself and subsequently from the separate legal identity do the members of an Islamic company enjoy limited liability?

    I would be honoured if you answered those. thanks.

  • Thank you Douglas this article really resonated with me Unfortunately, many second generation immigrants are trying to pay off their parents overwhelming mortgages. It is sad because they are now “serfs” of their parents decision. Rather than spending time and energy establishing something good for future generations they are spending it working to pay banks. May God Ease everyone’s burden and may he even the score for everything that banks and Wall Street has done to ruin people

  • I would also like to add that these homes are now undervalued…the mortgages are now bigger than the value of the home which makes the situation even more disheartening

    • Ameen to your prayers, and thank you for your thoughtful reply. The best thing you can do is to tell as many people as possible about what interest does. Unlike most people, you understand the “serfdom” of debt slavery that interest creates, and you stepped in to rescue your parents’ home instead of walking away. Nothing will change until enough people get fed up.

      Not everyone is able (or willing) to do what you’re doing for your parents, so may God reward you for your heroic act. I think part of your reward, at least in this world’s life, will be when home values eventually come back in line with people’s debt burden. God willing, a day will come when that home will be the thing that YOU have established for future generations. Maybe by then, there will be more interest-free options available for home financing.

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