By Ali Shareef

The financial crisis of the past few years has resulted in some deep soul-searching as we struggled to understand why what seemed to be the bedrock of financial stability came crumbling down. First Wachovia, the nation’s number four bank holding company, then Fannie Mae and Freddie Mac, followed by Merrill Lynch. It did not stop there; the Feds bailed out American International Group (AIG) for $85 billion and Washington Mutual became the largest bank failure in history. As the nation searched for a solution to the recession which started in December 2007, politicians debated bailout plans, CEOs lined up for government handouts, and perhaps, just perhaps, as we beat around the proverbial bush, we overlooked the root of the problem: interest or usury itself.

Given the prevalence of interest-based transactions today, it may be bewildering to indict interest itself as a problem. It seems logical, at face value, that a lender should gain some benefit for his risk in providing a loan. However, history has demonstrated that even if this practice of interest was initiated with the best of human intentions, it degraded into the worst of unabashed exploitation of the poor. It became the age-old mechanism that was used since the beginning of time to bind those who don’t have to those who have.

This appetite for profit even at the expense of those most impoverished is nothing new and has existed well before our time. An appetite that was recognized from one end of the world to the other—from ancient China to the Middle East—and manifested itself in the prohibition of interest. A surprisingly large number of ancient civilizations were against the practice of charging interest on loans.

Undoubtedly, capitalists will rise up and denounce this as a step back for the progress of humanity and civilization. However, we must ask: are we really more civilized now than when we exercised restraint in our appetite to consume and take advantage of others?

The Old Testament says: “’If he has not exacted usury nor taken any increase, but has withdrawn his hand from iniquity … And executed true judgment between man and man; If he has walked in My statutes and kept My judgments faithfully — He is just; He shall surely live!’ says the Lord GOD.” (Ezekiel 18:7-9)

“If he has exacted usury or taken increase — Shall he then live? He shall not live! If he has done any of these abominations, he shall surely die; his blood shall be upon him.” (Ezekiel 18:13)

Although Jewish scholars differ as to the meaning of these injunctions, it is clear that the very nature of interest was considered reprehensible—to the point that people who practiced it were cursed.

Even in early Christian history, we find that charging interest was considered “detestable to God and man, damned by the sacred canons and contrary to Christian charity” by Pope Sixtus V.

Lateran III decreed that people who charged interests on loans would “receive neither the sacraments nor Christian burial.”

In Islam, the Qur’an is unequivocal about the evil of interest:

“Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, ‘Trade is [just] like interest.’ But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to [dealing in interest or usury]—those are the companions of the Fire; they will abide eternally therein. Allah destroys interest and gives increase for charities. And Allah does not like every sinning disbeliever.” (Qur’an 2:275-276)

This is a tenant that many Muslims still adhere to. During the early Islamic civilizations, a variety of banking principles were introduced that did not resort to interest. Many of these principles are still applied today and many Islamic banks were largely unaffected by the recent subprime woes.

As the recent financial meltdown indicated, an interest-based economy results in the economy being built on thin air. Banks counted on interest on loans from borrowers to meet their operational costs. However, with the spike in fuel prices and unemployment, borrowers were unable to meet their payments. Faced with decreased cash inflow, falling home prices, and rising foreclosures, banks became bankrupt. When the House of Representatives rejected the $700 billion bailout plan on September 29^th 2008, the ensuing panic caused the Dow Jones to fall almost 778 point—the most ever for a single day since the Great Depression in 1929.

The reason why interest is so abhorrent is the preying of the lender on the borrower. The rich become richer and the poor become poorer. Who are the victims of the recent mortgage crises? Is it the Wall Street fat cats who sought millions in bonus even while the money for the bail-out was being coughed up by the Feds, or the struggling tax payers who must shoulder this burden?

For every dollar accepted by anyone in interest, inevitably there is someone who is struggling hand to mouth to pay that dollar in interest. Where does the bank get the money to pay depositors the returns on savings? People who are paying interest on their loans! A $100,000 loan at a fixed rate 15-year mortgage of 5.0 percent will accrue nearly $42,380 in interest—nearly half the loan itself!

Elimination of interest-based banking levels the playing field for the lender and the borrower alike. Islam is opposed to a guaranteed return for one of the parties at the expense of the other. One principle of Islamic banking entails that if a loss occurs, it is shared by both the lender and the borrower through a partnership. For example, if a person wants to start a business, the bank finances the startup costs and becomes a partner, thereby sharing in the profits from that business rather than charging interest on the loan. The person who started the business pays the original principal amount back in incremental payments. This lack of a guaranteed return forces lenders to be more aware of their lending practices, and decreases the lax lending practices that were one of the reasons for the financial failure. Another practice Islam especially prohibits is speculative investments such as futures—expected profit before the commodity is even available—which was another reason for the financial collapse.

The devastation of the financial markets today affects a larger number of people today than it did thousands of years ago. In today’s global economy, when the U.S. markets stumble, markets from Europe to Asia teeter in response. Interestingly, the prohibition of interest becomes more pertinent today than ever before.

In the face of the spiraling financial descent that we faced, and from which we have not yet fully recovered, it is not possible that a loving and merciful God would not provide guidance on how to conduct an aspect of humanity as important as commerce. He has warned us throughout history of the evils of our greed and has given us the knowledge to control it by prohibiting the use of interest. If we fail to recognize it and utilize it, then we have only ourselves to blame.

Part I | Part II

You don’t have to be a scholar or an economist to see that usury was at the heart of the global financial crisis.  Everybody wants a “guaranteed” return on his or her money, but Allah (swt) is the only One who can guarantee anything.  The world’s greed for interest, coupled with its lack of risk tolerance (or lack of faith), made triple A-rated mortgage-backed securities look like good safe investments a few short years ago.  After all, who’s not going to pay their mortgage?  We now know the answer to that question.

Lost your job?  Got sick or hurt?  Can’t pay your mortgage?  Can’t sell your house because the value has plummeted to less than what you owe on it?  No matter how many years you’ve paid your non-Islamic mortgage on time, the minute you can’t, the bank forecloses on you.  They pocket all that interest you paid for all those years, sell your house, cash, for pennies on the dollar, and start all over again, giving some other sucker a high-interest loan on its full appraised value.  Like a casino, they win and you lose.

Long before I embraced Islam, I noticed that even the Bible warned against interest and instead encouraged investing in people:

“If you should lend money to my people, to the afflicted alongside you, you must not become like a usurer to him.  You must not lay interest upon him.”  (Exodus 22:25)

“Cast thy bread upon the waters: for thou shalt find it after many days.”  (Ecclesiastes 11:1)

“He who is kind to the poor lends to the Lord, and He will reward him for what he has done.”  (Proverbs 19:17)

It seems that Prophets throughout human history advised  those blessed with wealth to take a chance with their money and trust in God for the increase.   The system of interest-free lending that the Prophet Muhammad ﷺ revealed—and upon which Islamic Finance is based—reads a lot like traditional Investment Banking.  So does Mufti Usmani’s description of a Shariah-compliant financial product called Musharakah (an Arabic word that literally means “sharing”).  It sounds to me as if Allah (swt) wants the lender and the borrower to be partners, sharing in the profits and losses of trade.  If the borrower is successful, the lender profits in kind.  If he fails, Allah (swt) accepts the lender’s loss as a charity (according to his intentions):

“And whatever you lay out as usury, so that it may increase in the property of men, it shall not increase with Allah; and whatever you give in charity, desiring Allah’s pleasure—it is these (persons) that shall get manifold.”  (30:39)

When I was a stockbroker in the 1980s, there was a lot more Investment Banking activity than you see today.  If you owned a business and you needed capital, you didn’t necessarily have to go to a commercial bank for a business loan.  You could go to a Wall Street investment bank and “go public,” by selling shares of your business to investors.  If your business did well, everyone who bought the shares of your IPO, or Initial Public Offering, could make many times what they invested.  If it failed, however, they could lose their entire investment.  It was all about taking a chance.

These days, it is considerably harder for businesses to raise capital through Investment Banking.  Google, VISA and Tesla are among the few well-known successful IPOs in recent years.  In the US, people are losing jobs because small businesses can’t get loans because banks aren’t lending.  If commercial banks aren’t lending like they used to, clearly investment banks aren’t helping businesses “go public” like they used to.  In fact, if you aren’t an already-successful business prepared to raise somewhere in the tens of millions of dollars in capital, most investment banks won’t even look at you.

Wall Street was created shortly after America’s birth, in order to put people to work by putting their money to work, taking a chance by investing in people’s businesses.  These days, no one wants to take a chance anymore, and everyone wants a “guaranteed” return on his or her money.  When the “housing bubble” burst, and even the most seemingly “guaranteed” investment—mortgage-backed securities—went belly-up, you would think that the world would finally get it:  that man can’t guarantee anything.  Nor can he create something from nothing.

When you buy shares of a company’s stock, you are, for all intents and purposes, loaning that company your money with no guarantee of getting it back.  When that company makes a profit, your stock goes up.  If it loses money, your stock goes down.  Life in this dunya is full of ups and downs.  Masha’Allah.

“Sons of Adam speak against [the vicissitudes of] Time, and I am Time, in My hand is the night and the day.” (Muslim)

Of course, not all stocks are halal.  Islamic Banks would obviously not finance companies that deal in pork products, pornography, alcohol, gambling or anything that is haram.  Shariah-compliant financial institutions are overseen by councils of scholars who adhere strictly to the Qur’an and Sunnah in making decisions.  While no organization run by man is perfect, it is clear that banking with Islamic Banks is a more pious alternative than the status-quo institutions that put the world in crisis.  Believers may have no control over whether their government complies with Shariah law, but if they have access to Islamic Banks, they can certainly control whether their money is borrowed and leant according to Shariah.  If Islamic Banks are following the Qur’an, they are lending  believers’ money as if lending it directly to Allah (swt):

“Who is he that will lend to Allah a goodly loan so that He may multiply it to him many times? And it is Allah that decreases or increases (your provisions), and unto Him you shall return.” (2:245)

“Indeed Allah took the covenant from the Children of Israel, and We appointed twelve leaders among them. And Allah said: ‘I am with you if you perform As-Salat and give Zakat and believe in My Messengers; honor and assist them, and lend a good loan to Allah, verily, I will expiate your sins and admit you to Gardens under which rivers flow (in Paradise). But if any of you after this, disbelieved, he has indeed gone astray from the Straight Path.’”  (5:12­)

“Who is he that will lend Allah a goodly loan: then (Allah) will increase it manifold to his credit (in repaying), and he will have (besides) a good reward (i.e. Paradise).”  (57:11)

“Verily, those who give Sadaqat (i.e. Zakat and alms), men and women, and lend Allah a goodly loan, it shall be increased manifold (to their credit), and theirs shall be an honorable good reward (i.e. Paradise).”  (57:18)

“If you lend Allah a goodly loan (i.e. spend in Allah’s Cause), He will double it for you, and will forgive you. And Allah is Most Ready to appreciate and to reward, Most Forbearing.”  (64:17)

“Verily, your Lord knows that you do stand (to pray at night) a little less than two thirds of the night, or half the night, or a third of the night, and also a party of those with you. And Allah measures the night and the day. He knows that you are unable to pray the whole night, so He has turned to you (in mercy). So, recite you of the Qur’an as much as may be easy for you. He knows that there will be some among you sick, others traveling through the land, seeking of Allah’s Bounty, yet others fighting in Allah’s Cause. So recite as much of the Qur’an as may be easy (for you), and perform As-Salat and give Zakat, and lend to Allah a goodly loan. And whatever good you send before you for yourselves (i.e. Nawafil non-obligatory acts of worship: prayers, charity, fasting, Hajj and ‘Umrah), you will certainly find it with Allah, better and greater in reward. And seek Forgiveness of Allah. Verily, Allah is Oft-Forgiving, Most-Merciful.”  (73:20)

The Prophet Muhammad ﷺ also outlawed derivatives like commodities futures, as they involve betting on the future, or hoarding foodstuffs people need in order to wait for a higher price:

“If anyone keeps goods till the price rises, he is a sinner.”  (Muslim)

“He who brings goods for sale is blessed with good fortune, but he who keeps them till the price rises is accursed.”  (Ibn Majah, Darimi).

“If anyone withholds grain for forty days, thereby desiring a high price, [he has] renounced God and God has renounced him.”  (Razin)

“Whoever pays in advance the price of a thing to be delivered later should pay it for a specified measure at specified weight for a specified period.”  (Bukhari)

Only Allah (swt) knows the future.  The Prophet ﷺ also spelled out the loan guarantee that only Allah (swt) can make:

“He who grants a respite to one who is in straightened circumstances or who remits his debt, will be saved by God from the anxieties of the Day of Resurrection.”  (Muslim).

“If anyone accepts others belongings meaning to pay back, God will pay back for him, but if anyone accepts them meaning to squander them, God will on that account destroy his property.”  (Bukhari)

“Every fault but a debt will be forgiven to a martyr.”  (Bukhari)

“A believer’s soul is attached to his debt till it is paid.” (Shafi’i, Ahmad, Tirmidhi, Ibn Majah, Darimi)

“May Allah’s mercy be on him who is lenient in his buying, selling, and in demanding back his money.”  (Bukhari)

Besides dealing in interest and trading in haram businesses, the biggest difference between Wall Street and Islamic Finance seems to me to be, once again, people vs. profits.  Many publicly-traded companies pollute the environment, make harmful products, or overwork, underpay, injure or even kill their workers, all in the name of maximizing profits.  My understanding of to “lend Allah a goodly loan” is to use one’s wealth to develop earth’s resources by putting people to work safely and paying them properly, with the hope of a reward from Allah (swt) according to one’s intentions.

One need only study the outcome of the sovereign debt crisis in Europe vs. the sovereign debt crisis in Dubai to see the benefit of Shariah-compliant instruments such as Sukuk Bonds.  While far from perfect, those instruments brought the UAE to a relatively soft landing, compared to the still-unfolding developments in Europe.

Even the way in which banks decide where to invest people’s money has become less focused on people’s needs, and more focused on banks’ need to “guarantee” profit.  Back when I was a stockbroker, almost all stock-picking was based on fundamentals.  Financial analysts made recommendations to buy or sell a stock based on the basics of that company’s business:  its management team, market capitalization, market share, earnings-per-share, balance sheet, business model, etc.  Today, technical analysis, or stock research that tries to forecast the direction of a stock price by studying trends like changes in price and volume over time, has overtaken fundamental analysis as the main method of figuring out whether an investor should buy, sell or hold a given stock.  Every day in the business news media, market strategists fall over themselves (and often contradict each other) to interpret moving averages, advance-decline lines, support and resistance levels and other statistical factors, in a sophisticated but flawed effort to “scientifically” predict the future.  A future that only Allah (swt) knows.

I mentioned the increasing use of technical analysis to illustrate the gradual shift away from human factors in investing, and towards a reliance on statistical models and raw numbers.  I remember years ago a TV commercial for Janus mutual funds that touted how their analysts visited a construction site to physically count the number of cables a company was installing.  This was billed as their “hands-on” approach to determining if a company was a good investment.  Contrast that with today’s Ameritrade commercials that promote things like “heat mapping” and “advanced charting tools.”  It’s as if no one cares any more about the human element of business.  Managers decide where investors should put their wealth by looking at charts, graphs and algorithms of the past, instead of looking at where that wealth will employ the most people at the best pay, which would in turn create the most demand, which is what drives an economy.

In the debate over the Bush tax cuts for the rich, those who favor them expiring on schedule, as well as those who favor extending unemployment benefits to those still out of work understand the Keynesian economic principle that helping the poor stimulates the economy.  Many of those in favor of permanent tax cuts for the top 1% argue that such cuts would spur job growth.  History tells a different story.  Both methods increase the US federal budget deficit.  Relief money for the poor gets spent immediately and the increased demand keeps people working and even creates jobs.  Meanwhile, tax cuts for the rich get saved in banks and investments, which only helps the bottom line of the banking industry in terms of commissions, fees and, yes, interest.  History also shows that the amount of those tax cuts that the rich spend on luxuries does little for the overall economy.

A glaring example of this is what is happening with the banks as of the time of this writing.  Instead of lending to businesses and consumers, banks are hoarding cash and buying Treasury bonds.  So they’re lending to the government, to make “guaranteed” money off interest, but they’re not lending to you and I.  And even when they do, it’s not to share in our profits but to make us guarantee theirs—when we pay them far higher interest than what they pay to get the money they lend to us.   Yet if we lose our jobs and can’t pay, they put us out of business and put us out of our homes no matter how much we’ve put into them.  Banks borrow their money for next to nothing, but they want everything from the people who need that money the most.  Meanwhile, the largest ones got bailed out handsomely (with the people’s money) when they got in trouble.

But the deeper issue is about society as a whole.  Allah (swt) made usury haram for a reason.  It enriches those who have money at the expense of those who need it.  We suffer as an Ummah when we can’t get money to launch our businesses, or go to school, or buy big-ticket items like a home or a car.  We go to banks because we think we don’t have a choice—and the result is that all our hard-earned money goes to institutions that make their money from the usury they charge when they lend out the money we deposit.

If you think about it, every Muslim doing business with a traditional bank is, in a very real way, funding usury.  Which is haram.  Non-Islamic banks have no reason to care about the financial needs of the Muslim community, and may even fund activities that are destructive to Muslims.  Aren’t the financial needs of the Believers the very reason the Prophet (ﷺ) revealed the hadith on usury in the first place?

Imagine what would happen if every Muslim in the world who had a bank account suddenly withdrew all their money and put it into an Islamic Credit Union, or a Shariah-Compliant Investment Company?

What if your business was financed with an interest-free loan you paid back according to your profits?  No profits, no payments.  The more you profit, the greater the dividend to your lender.

What if your student loan payments were based on the salary of the job you got once you graduated?  What if that loan was forgiven as long as you couldn’t find work?

What if your home mortgage allowed you to own a greater percentage of your home with each payment you made?  The more payments you made, the more of the home you owned.  If you couldn’t pay, the home would get sold and everyone would walk away with what they put in.

Only Allah (swt) knows if these high ideals of Islamic Finance can be put into practice in precisely this way in the real world.  But what if when you borrow money you’re not just a number, but a human being and a beloved member of a community that takes the time to get to know you, your family, and your needs?   What if your lender was your partner—instead of your slavemaster?  What if the institution that financed your business, your home and your education rode with you through life’s ups and downs, and didn’t make money unless you made money?  Call me naïve, but I think this is what our Prophet ﷺ had in mind.

Again, I’m no scholar.  I’m just a recent revert to Islam who couldn’t help but notice that there’s a credit crisis going on that was caused by banks dealing in usury.  Those dealing in usury want to create money out of nowhere with their Wall Street wizardry.  And they expect borrowers to guarantee their profits, when only Allah (swt) can guarantee anything.  So it would seem to me that if Believers don’t eat pork, drink alcohol or gamble, neither should we support usury by keeping our money in banks.  Maybe if we all moved all our money to Islamic credit unions and Shariah-compliant financial institutions, jobs might get created, real assets might get created and, inshaAllah, wealth might get created.  And even if it didn’t, we would at least stop enabling usury, which is haram.  Thus avoiding the painful chastisement promised by Allah (swt).  And thus pleasing Allah (swt) because any money we lost in the process would count as charity.  But what do I know?  Allah (swt) knows best.

Part I | Part II

When 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.

The prohibition of interest in Islam is a Divine ruling; hence a Muslim seeks to submit to it. Nonetheless, there are two crucial aspects to such submission. Firstly, we believe that all Divine rulings have wisdom, even if we are not cognisant of the wisdom. Secondly, with abstinence of and opposition to interest, as with any act of obedience done with profound reflection and inner awareness, there is huge potential of high spiritual benefit in both this world and the next, by the will of God. Nevertheless, the opposition to interest can also be seen in the context of the Islamic imperative for Muslims to be at the forefront of pushing the agenda for global social justice. A collective observance of the prohibition is a defence against societal and economic corruption, which ultimately can smite the good and bad alike, without differentiation. Sadly, in the face of the defences of interest based on economic theories founded on a false understanding of the reality of humanity and the general acceptance of interest, one will be able to apply to the issue of interest the following words that Leo Tolstoy wrote against current theories of art in his What is Art?

“If a theory justifies the false position which a certain part of society is in, then, however baseless and even obviously false the theory may be, it will get adopted and become the belief of that part of society…However baseless theories of this sort may be, however contradictory they may be to everything mankind knows and recognizes, however obviously immoral they may be, they are accepted on faith, without criticism, and are preached with passionate enthusiasm, sometimes for centuries, until the conditions they justify are done away with or the absurdity of the theories becomes too obvious.”

An Introduction to Interest

Shaykh Muhammad Shafi, in The Issue of Interest, enumerates the many Quranic verses that prohibit riba, such as 2:275-6 and 2:278-9. The latter includes the stern warning: “O you who have believed, fear Allah and give up what remains [due to you] of riba, if you should be believers. And if you do not, then be informed of a war [against you] from Allah and His Messenger. But if you repent, you may have your principal – [thus] you do no wrong, nor are you wronged.” Shafi explains how riba is translated into Urdu as sud as though they ‘are one and the same thing in Arabic and Urdu,’ but ‘riba carries a general and wider connotation and the prevailing phenomenon of sud is a kind or type of riba. The prevailing phenomenon of sud refers to lending of a specific amount for a specific period on a specific rate of profit or increase, and no doubt this is riba. But riba is not limited to this and has a much wider connotation. It includes many transactions of sale, purchase, where there is no element of credit.’ This discussion can be directly applied to a similar mistake in English if we only understand riba as interest. In summary, interest is, in the words of Shafi, ‘the compensation or the excess paid for an extension in the tenor of the loan’ as  ‘the offer by the borrower that he will pay an extra sum of money if the lender extends the moratorium for repayment.’

In specific response to those who might claim that it is acceptable to merely receive interest from a bank, Shaykh Hussain Hamed has written:

“Bank deposits are considered loans by law and by the consensus of jurists, and “any increment in a loan is riba,” as the Prophet ﷺ states in his hadith. In reality, banks deal freely in people’s deposits; they unilaterally dispose of them by using them in lending to other people for interest. At the same time, banks are committed to pay that money back with interest. These are the characteristics of loans as stated in law, with no regard to how such interest is estimated, what its percentage is, or what the name given to it is. It is no matter whether such extra money given on the capital is called benefit, gain, earning, interest, reward, gift or whatsoever. What matters are the actual results effected by the contract between the bank and the dealers, because contracts are governed by the results they entail. Rulings are generally given to real matters not to hypotheses. Moreover, the claim that banks are just investors by proxy that invest money deposited therein in legal projects has already been refuted by law, Shari`ah [Islamic law] and by experience.”

[The full explanation of the details regarding riba is beyond the scope of this article, but one would be well-advised to view the in-depth explanation in Shaykh Wahbah Zuhayli’s Financial Transactions in Islamic Jurisprudence.]

Imam Qurtubi, in his Tafsir on Qur’an 2:275-9, relates the strongest condemnations of the practice of riba narrated from the hadith and pious early generations, especially in relation to God’s declaration of ‘war’ against the people of riba and how God obliterates riba. He further states that 2:279 indicates that practising riba is a major sin and there is no disagreement upon that. Indeed, he narrates that Ibn Khuwayzimandad stated that the belief that riba is lawful is an act of apostasy. Muhammad Shafi, in his Ma’ariful Qur’an in commentary of 2:279, says, ‘So severe is this warning that any other warning of such severity does not appear anywhere in the Qur’an in relation to any other sin, no matter how great, except kufr (disbelief), of course.’

Over the ages, the matter of interest has been treated with abhorrence and condemnation. In the West, this disgust goes back to the Greek philosophers. John Kenneth Galbraith, in A History of Economics: The Past as the Present, notes how Aristotle ‘strongly condemned the taking of interest’ because, in Aristotle’s (384-322 B.C) words, ‘money was intended to be used in exchange, but not to increase at interest.’ Galbraith explains the reasoning for this dislike: ‘interest was an unworthy extraction from the less fortunate arising from possession of the money by the more fortunate.’ He notes that ‘interest continued to be strongly condemned throughout the Middle Ages’ until it was later ‘redefined as a payment for productive capital – when it became compellingly evident that the one who borrowed money made money out of doing so and should, in all justice, share some of the return with the original lender’, and then it was considered ‘reputable.’ At that point, Galbraith states that the ‘religious precept and the accepted ethic were then, not exceptionally, adjusted to this circumstance’, ‘but the taking of interest for personal needs or use continued to have a slightly unwholesome, even suspect, reputation.’

Galbraith notes that ‘early Christian doctrine strongly condemned the exaction of interest; as with the Greeks, it was seen as extortion by the fortunately affluent from the unfortunate, unwise or impoverished who were pressed by needs and obligations beyond their means.’ Moreover, this orthodox condemnation of interest is shown by Galbraith to extend to the leading Christian theologian Thomas Aquinas (1225-1274), as exhibited in his Summa Theologica. However, Galbraith argues that ‘mercantilism involved…a marked break with ethical attitudes and instructions of Aristotle and of Saint Thomas Aquinas and the Middle Ages in general’ due to the influence and dominance of merchants in society, and that the charging of interest ‘lost its evil or dubious connotation’; and with it, in the words of Galbraith, ‘religious faith was accommodated to economic circumstance and need.’ He adds that ‘both Catholic and Protestant church doctrine’ changed their stances, ‘however reluctantly and gradually.’ [Galbraith explains that ‘merchant capitalism’ or ‘mercantilism’ is said to cover ‘three hundred years, from very roughly the middle of the fifteenth century to the middle of the eighteenth, with the end vividly marked by the beginning of the Industrial Revolution, the American Revolution and the publication of Wealth of Nations by Adam Smith [in 1776].’]

Both Shaykh Taqi ‘Uthmani in The Historic Judgment On Interest: Delivered in the Supreme Court of Pakistan and Ahamed Kameel Mydin Meera in The Theft of Nations: Returning to Gold have brought forth a number of passages from the Old and New Testaments that order people not to charge ‘interest,’ such as Exodus 22:25. Now ‘Uthmani presents Qur’an 4:161 as the evidence that the Tribe of Isra’il was prohibited to charge interest. Meera states that all ‘three Abrahamic faiths – Judaism, Christianity and Islam –…strongly condemned the practice of charging interest.’ The latter assertion becomes a somewhat difficult argument to sustain when one takes Judaism and Christianity from within what has become their tradition, as opposed to taking a Qur’anic method towards explaining their faiths.

Firstly, as pointed out by Israel Shahak in Jewish History, Jewish Religion: The Weight of Three Thousand Years, numerous Biblical verses are ‘understood’ in what Shahak calls ‘classical Judaism’ or latter-day ‘Orthodoxy’ in a manner ‘quite distinct’ to the ‘literal meaning’ or understood by a Christian or reader of the Old Testament. Shahak argues that these forms of Judaism are bound more by Talmudic law than the Biblical text. In the case of interest, Shahak argues that Talmudic law only initially banned Jews from charging interest from fellow Jews; but, over time, innovative legal stratagems were devised to even get around this latter prohibition.

Secondly, as highlighted by Taqi ‘Uthmani in his What is Christianity?, one has to understand the wide scope for legal reform within Christianity in light of Paul’s renunciation of the Law of the Torah in favour of just faith in Jesus, which conflicted with the earliest conveyors of Jesus’ disciples and is pivotal because Paul is, as stated by ‘Uthmani is the latter work, really the ‘founder of present day Christianity’ – if one takes a Biblical method then one is forced to become ‘bewildered’ like Michael Baigent and Richard Leigh in The Dead Sea Scroll Deception in trying to accurately determine the details of the life of Jesus (upon him be peace). Hence this foundational spirit of freedom exhibited by Paul has led Christians to freely amend laws and attitudes over time, for even if they reject some of Paul’s positions, they can still use his methodology and apply it as they see fit. Tom Holland, in a recent documentary on Paul for Channel Four in the UK, entitled ‘The Bible: A History’ and aired on 28 February 2010, felt it was apt to end his programme with, ‘That all you need is love’ – after arguing in favour of the thesis that the central method of Paul’s invitation of faith to non-Jews, like Greeks and Romans, was to emphasise that they could dispense with the Law, and just suffice with loving Jesus (upon him be peace). Thus Holland mentions that the roots of changing the Law can be seen in Paul himself; furthermore, even if Paul and the Church adhered to current ‘morals,’ they could be ever changed on the basis of ‘love.’

The acceptance of interest is now almost universal, and it is intrinsically linked to the modern banking system; and the latter is crucial for what we see as development in the West. For example, look at the industrial development of Britain and the crucial role played by the establishment of the Bank of England. Dan Snow’s BBC series entitled ‘Empire of the Seas: How the Navy Forged the Modern World’ – in an account that is essentially supported by Galbraith in Money: Whence it Came, Where it Went and Tarek El Diwany in The Problem with Interest, but Snow makes broader connections – shows that Britain’s affluence is due to the facility of interest-based loans administered through the establishment of the Bank of England in 1694, in order to raise funds for the King to develop the navy for military engagement with the French. In this scenario, the newly-formed Bank agreed to pay 8% on loans of £25 from the people; then the massive wealth raised by the keen accepters of this offer was loaned to the King by the Bank. This method was far more popular than raising taxes, but it also was the beginning of the national debt. Nevertheless, the financial revolution was to spur on the industrial revolution, as the influx of newly-available money led to industrial innovations and bolstered agricultural produce that were created to feed and aid the navy. Snow talks of these matters coupling with the belligerent and war-mongering pursuit of booty by the English, and a strategy of ‘relentless aggression,’ which also included the conquering of lands by force for the opening up of wealth and the utilisation of the slave trade (especially in the Caribbean). Consequently, Britain achieved ‘global supremacy’ when defeating the French in 1759. Thus it is difficult for us English to view interest and banking in a cold impartial light when it is so deeply embedded in the economic comfort that we so enjoy now; and anything murky, especially widespread bloodshed, is slightly disconcerting to the image of purity we so seek to construct about ourselves.

Wisdom and Cause in the Sacred Law

In The Lawful and the Prohibited in Islam, Shaykh Yusuf Qaradawi argues that God, al-Rahman al-Rahim (The All-Merciful, The Compassionate), prohibits and permits for ‘people’s well-being,’ for He is not ‘arbitrary’ in regard to legislation. He adds:

“Accordingly, He has neither permitted anything except what is pure nor has He prohibited anything except what is impure…If something is entirely harmful it is haram [forbidden], and if it is entirely beneficial it is halal [lawful]; if the harm of it outweighs its benefit it is haram, while if its benefit outweighs its harm it is halal. This principle is explained in the Qur’an in relation to wine and gambling: ‘They ask thee concerning wine and gambling. Say (O Prophet): In them are great sin and some benefit for human beings, but the sin is greater than the benefit…’ (2:219). By the same logic, if it is asked, what is halal in Islam? The answer is, the good things. Good things are those which moderate people acknowledge to be wholesome and which are approved by human beings in general without relation to the habits of a particular group. Allah Ta’ala [God the Exalted] says: ‘They ask thee what is lawful to them (as food). Say: Whatever is good is lawful to you…’ (5:4). He also says: ‘Today whatever is good is made lawful to you…’ (5:5).

“The Muslim is not required to know exactly what is unclean or harmful in what Allah has prohibited; it may be hidden from him but be apparent to someone else, or its harm may not have been discovered during his lifetime but may be understood at a later period. What is required of a Muslim is simply to say, ‘We have heard and we shall obey’ [Qur’an, 2:285]. Do we not observe that Allah prohibited the eating of pork without the Muslims being aware of the reason for its prohibition apart from the fact that the pig is a filthy animal? Centuries passed, and then scientific research discovered the presence of parasites and deadly bacteria in its flesh. Yet even if scientific research had discovered nothing in pork, or if it had discovered much more than this, the Muslim would still continue to believe it to be unclean.”

Furthermore, by way of emphasising the above from Qaradawi, Muhammad Shafi says in commentary of Qur’an 2:275 in Ma’ariful Qur’an:

“When He declares something to be halal, and something else to be haram, you should immediately realize that there must be some loss or harm or evil in that which has been declared haram, even if one does or does not see through it. This is because the actual reality of this whole system, and the benefit and harm that lies therein, can only be encompassed by the same ‘Alim (the Knower) and Khabir (the Aware) from Whose reach of knowledge the minutest particle of the world cannot escape. The individuals or groups in this world can identify their expedient gains and their losses, but they cannot claim to have encompassed the entire range of benefits and harms affecting the whole wide world. There are things that appear to be beneficial for a certain person or group but, when looked at in the perspective of the whole nation or country, the same things prove to be harmful.”

Shaykh Ibn ‘Ashur, in his Treatise on Maqasid al-Shari’ah, argues in a manner that really does not require commentary, for it succinctly sums up the whole affair:

“From a comprehensive thematic analysis of the textual sources of the Shari’ah pertaining to the objectives of legislation, we can draw the following conclusions. Both its general rules and specific proofs indicate that the all-purpose principle (maqsad ‘amm) of Islamic legislation is to preserve the social order of the community and insure its healthy progress by promoting the well-being and righteousness (salah) of that which prevails in it, namely, the human species. The well-being and virtue of human beings consist of the soundness of their intellect, the righteousness of their deeds as well as the goodness of the things of the world where they live that are put at their disposal…If He had not intended the orderly running of the world, He would not have ordained punitive laws to deter people from perpetrating corruption nor permitted them to enjoy the beautiful and good things of life…Human beings have a natural propensity for perfection. However, their actual achievement of perfection develops only gradually in tandem with their spiritual purification and moral uplifting.”

A righteous soul, believing that their Lord is All-Wise in His rulings, might easily confuse wisdom and cause; and therefore permit or deem unlawful on the basis of wisdom, whilst contradicting the ruling established by the necessary cause or causes, hence reaching an incorrect conclusion due to failing to observe a sound jurisprudential method. This is outlined by Taqi ‘Uthmani in the Historic Judgment in his differentiation between ‘illa and hikma. He establishes that ‘illa in this issue of interest is:

“The basic feature of a transaction without which the relevant law cannot be applied, whereas Hikmat is the wisdom and the philosophy taken into account by the legislator while framing the law or the benefit intended to be drawn by its enforcement. The principle is that the application of a law depends on the Illat and not on the Hikmat…To cite another example, the Holy Qur’an has prohibited liquor. The Illat of its prohibition is intoxication but the Hikmat of this prohibition has been mentioned by the Holy Qur’an in the following words: ‘The Satan definitely intends to inculcate enmity and hatred between you by means of liquor and gambling, and wants to prevent you from remembering Allah. So would you not desist?’ (5:91)…It is in the same way that after mentioning the transaction of Riba, the Holy Qur’an has mentioned the Zulm [inequity] as a Hikmat or a philosophy of the prohibition, but it does not mean that prohibition will not be applicable if the element of Zulm appears to be missing in a particular case. The Illat (basic feature) on which the prohibition is based is the excess claimed over and above the principal in a transaction of loan…Another point worth mentioning here is that the Illat of a law is always something determinable by hard and fast definition which leaves no room for a dispute as to whether the Illat is or is not available. Any relative term which is ambiguous in nature [like Zulm] cannot be held to be the Illat of a particular law because its existence being susceptible to doubts and disputes…”

To be continued in the second part.