Questionaire for Jurisconsults, subject specialists and general public in connection with re-examination of Riba/Interest based laws by Federal Shariah Court
Answers by Shaykh Umar Ibrahim Vadillo
Answers from the perspective of the classical most respected texts of Islamic Law and the practice of Muamalat as the socio and economic model of Muslim societies under the Khalifate
In the Name of Allah, the Merciful, the Compassionate
Answers to the Questionaire
Introduction to the Answers
Allah is the Light of the Heavens and the Earth. His Commands have Mercy upon mankind and they are a Guidance for the muminun. The prohibition of riba is the most important prohibition in Islamic Law after shirk. Our times are the times in which riba has become the dominant way of living of our people. For three hundred years we have been losing ground to the advancement of riba. The time has come to stop that trend and regain the ground we have lost.
What we are facing today is a system of riba in full display and on the other hand our system of Law that repudiates it. Two choices are before us. The first choice is the one of the munafiqun who have tried to reform Islamic Law to adapt it to capitalism. The second choice is the one of the muminun who want to reform our ways of living to adapt it to Islamic Law.
These two are two irreconcilable paths. For the last one hundred years the way of the Islamic reformers have led us to Islamic banks, Islamic Insurance, Islamic democracy, Islamic credit cards, Islamic secularism, etc. This path is dead. It has shown its face of hypocrisy and has led the Muslim world to a place of servile docility to the world of capitalism.
The obsession of the reformers was to introduce the “enlightened” conviction that reason could achieve all knowledge, supplant traditional religion and ensure progress towards happiness and perfection. Their tool was to rename their rationalism as ijtihad and everything else as taqlid. Their trick was to play with the meaning of words. One important word was riba. First they had to throw into confusion. Confusion was the perfect arena to bring “their ijtihad”. “Their ijtihad” had a clearly aimed purpose to reform the Shariah to comply with capitalism.
The truth is that there is no confusion other than the reformers’ own confusion. The truth is that we know “ijtihad”, its foundations in the usul al-fiqh and its limits: not everything is open to ijtihad. Our ijtihad on the matter of riba is known and the conclusion and boundaries are clear. The authoritative work of Ibn Rushd in his “Bidayat al-Mujtahid”, translated into English by our venerable Pakistani Scholar Professor Imran Nyazee, is the our definitive proof that the door of ijtihad was never closed. Ibn Rushd looks into all the positions of the madhhabs and established the firm basis of what is known and accepted and then he established the peripheral matters open in which there is dispute. It is on those peripheral matters where ijtihad is possible, not in the firm basis in which there is no dispute.
Reformers throw everything into dispute. The subsequent effect was to bolster the rational approach. They changed the definition of riba al-nasiah and they eliminated the importance of riba al-fadl (a discussion on these matters follows). To create confusion they too three avenues:
- They insisted to read the Qur’an without the Tafsirs. This approach, which was considered the sign of hypocrisy and corruption to our peers, was for them the norm.
- They insisted to read the Hadith without the Sunnah or rather, the Hadith becomes the Sunnah. Thus the text was deprived of the contextual reality in which it took place, that is, the ‘amal of the ahl al-Madina.
- They transformed our Traditional Jurisprudence (Maddhabs) into the purely conceptual “principles of Islam” or the “spirit of Islam”.
Being already in possession of “the truth”, the reformers were interested in the rational demonstration that the sources (through a literal approach deprived of their original reality) endorsed banking and the Constitutionalist State as the new progressive reality. All reformers were pro-banking and pro-constitutions. Constitutionalism was in the history of Islam the gathering idea of all anti-khalifate and anti-Islamic forces. Banking was to usury what brothels are to prostitution. In as much as the idea of Islamic brothels sounds to the muminun like a repellent contradiction, so were the Islamic banks they so eagerly defended.
In this spirit of creating confusion we must take account of the current methodology of including the so-called jafari school of thought of the Shi’a into the realm of our four accepted maddhabs. The differences between our madhhabs are blessings. But anything beyond that is deliberate confusion. The purpose of this approach is to glorify the methodology, not the outcome. On the surface this is to make the debate wider, on a more profound level this is to dismantle consensus.
The clarity is there. To refer to our authoritative scholars of the past is safety, it is not to rely blindly on medieval scholarship. Islam did not start with Rashid Reda and Muhammad Abduh (the fathers of Islamic reform), but it is a long path which originates in Madina. The Tafsirs and the Fiqh, in the context of the Amal of the ahl al-Madina is the realm of protection and renewal.
The time has come to return to Madina. Madina is our model, it is our source and our inspiration. What is before us is not the opportunity to deal with the legal issues of Pakistan, but to show the entire world that Islam is alive and a new model without riba exists. Our focus must be in what is that model, what is halal, above what is haram. Because it will be impossible to eliminate illness without understanding what is health.
The stakes are in our hands. Rasulullah (pbuh) is our example. And Victory belongs to Allah.
Shaykh Umar Ibrahim Vadillo
1 What is the authoritative definition of Riba, in the light of the Commentaries of the Holy Qur’an? Is there any difference between Riba, Usury and interest? Can the term Riba be also applied to commercial and productive loans given by the banks and financial institutions on the basis of interest?
Riba is “any unjustified increment between the value of the goods given and the countervalue (the value of the goods received)”. There is a huge difference between Riba, usury and interest. Riba is applicable to all kind of loans whether commercial or productive.
The Definition of Riba
Amongst the most accepted and known Tafsirs, the Ahkamul Qur’an of Qadi Abu Bakr ibn al-Arabi (1076-1148) stands out for its authority and clarity on the matters of the hukum in the Qur’an. His definition of riba stands as the most accepted classical definition of riba. He defines riba as:
“any unjustified increment between the value of the goods given and the countervalue (the value of the goods received)”.
This definition people of Qadi Abu Bakr resembles the classical understanding of commercial transactions which precedes Islam. The classical understanding was based on Aristotle, who said that the value of the goods exchanged must be “equal”.
In book V of the Nichomachean Ethics, Chapter 3 Aristotle states: “ …in any kind of action in which there is a more and a less there is also what is equal. If, then, the unjust is unequal, the just is equal…”.
In chapter 5 of the book on Justice, Aristotle continues on this point. He states,“… in associations for exchange this sort of justice does hold men together – reciprocity in accordance with a proportion and not on the basis of precisely equal return”.
In Politics, in Book One, Part X, defines usury as the lending of money at interest: “The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it. For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of an modes of getting wealth this is the most unnatural.“
This principle of equality in the values of a transaction reigned supreme in the understanding of justice in trading. It has been known in the West as the exchange-value theory. It follows that any increment between the values (between the given and the received) is seen as an injustice. This is relevant to the exchange of good of equal genus, such as, the exchange of money and the loans. The Hebrew word tarbith (same root as riba) meaning increment is used to describe an unjust transaction. Thus was understood as the classical definition of justice and usury in the commercial transaction.
The difference between that the classical understanding of usury/increment in the West and in Islam resides on defining what amounts as an increment. In Islam the issue of justice in the transaction includes two criteria held by these two expressions:
- “equal for equal”
- “hand to hand” (yadan bi yadin)
Narrated Ibn ‘Umar: The Prophet said, “The selling of wheat for wheat is Riba except if it is handed from hand to hand and equal in amount. Similarly the selling of barley for barley, is riba except if it is from hand to hand and equal in amount, and dates for dates is usury except if it is from hand to hand and equal in amount.” [Al-Bukhari, Volume 3, Book 34, Number 379]
Thus in Islam the increase is of two types: the increase of disparity (riba al-fadl) or inequality in the values and the increase of deferment (riba al-nasiah). Arguably, the definition of the West was only riba al-fadl, that is, the increase in quantities. The definition of riba al-nasiah, that is to include a deferment in a transaction in which deferment is not justified (i.e. the exchange of money), is unique to Islam.
How the Classical Definition of Usury Changed in the West
Jeremy Bentham (1748-1832) was responsible for changing that classical definition for a new one and opened the door to a new infamous ideology which claimed to be a science: Economics. In Bentham’s famous book “Defense of Usury” (1787) [G.K. Chesternon identified Bentham’s essay on usury as the very beginning of the “modern world”], an attempt is made to justify usury by changing the definition of value. His definition can be called subjective-value theory: value is deprived of its existential reality based on the exchange of goods and is given a new definition based on a subjective perspective of value. Bentham argued that the value from the point of view of the giver of the goods is to give something that in his view is of lower value for something that also in his view is of higher value, the goods that he receives. Thus, Bentham argues, all the transactions are in fact unequal, that is, they all have an increase (riba); and therefore he brings the argument against riba to an absurdity: trading cannot be all unjust. He thus he rendered in the eyes of his followers the Aristotelian view as obsolete, and by extension the Islamic view on the matter.
Bentham mis-definition of usury became what is now the standard definition of usury: “The taking of a greater interest than the law allows… (or) the taking of greater interest than is usual.” He argued “that no man of ripe years and of sound mind, acting freely, and with his eyes open, ought to be hindered, with a view to his advantage, from making such bargain, in the way of obtaining money, as he thinks fit: nor, (what is a necessary consequence) anybody hindered from supplying him, upon any terms he thinks proper to accede to.” Bentham’s argument, written against proposed legislation in the Irish Parliament, won out in the English Parliament, which abolished the law against usury.
Bentham and the philosophy of utilitarism that he founded became the corner stone upon which the so-called science of Economics will be later based. Economics is an ideology based on riba is acceptable. It follows that Muslims educated in this fashion of Economics, the great majority today, will have a great difficulty in understanding the classical definition of Qadi Abu Bakr ibn al Arabi.
When we say that Qadi Abu Bakr and Aristotle use an existential view of value, as opposed to a subjective view of value, we are making a reference to the epistemology of the matter. To understand the definition of Qadi Abu Bakr or in fact almost any other jurist before Bentham requires understanding of this epistemological issue:
- An existential approach is to see the actual exchange as the act of evaluation itself. It maintains that value is not an abstract concept belonging neither to “an” intrinsic nature of the goods nor to the subjective feeling of the buyer or seller.
- A subjective approach is to see under the subjectivity of each individual (involved in the transaction) as the (subjective) value of the goods.
Carl Menger (1840-1921), the founder of the Austrian school of economics, wrote: “value is …nothing inherent in goods, no property of them, nor an independent thing existing by itself. It is a judgement economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being.” This view of Menger shows that the refusal of accepting the subjective view of value of Bentham has been present in Europe despite the general disregard that politicians had on his school of thought.
The classical view and the Islamic view is that value is an act, it is not an idea. The existentialist approach is based on: “an act is not an idea, an act only IS in its execution”. Value as an act means that when two individuals are exchanging two sets of goods they are defining the value of the goods. Equality is therefore seen in the light of the act, the conditions of the exchange and the goods exchanged, rather than in psychological approaches.
The subjective approach places the idea above the reality of the exchange, whereby irrespective of the exchange the transaction is always “unequal” seen as a subjective concept. As some of the French physiocrats after Bentham argued that:
“if one individual believes that the value of the goods he sells is lower than the value of the goods he receives, and then the other individual believes that the value of the goods that he is buying are higher than the goods that he is paying with, then this is the proof that that concept of value has no significance or it is a proof the value of the goods is equal.”
If this debate still appears meaningless then we need to remember what is at stake: Bentham is trying to find a rational formula to justify usury and thus demolish the thousands of years old prohibition of usury.
Allah says in the Qur’an: “Be aware of those who say riba is just like trading”. This is precisely how Bentham tries to justify usury and this is how it is justified today all over the world.
Allah says in the Qur’an: “trade is halal and riba is haram” The profit of trading is halal, the profit of riba is haram. The profit of trading involves at least two transactions, in both there is “equal for equal”; the profit is only calculated when you compare the two transactions. But in riba there is profit (increase) in just one transaction and that is forbidden. How this unjustified profit or increase happens determines what we know as the two types of riba:
- when the unjustified increase is a disparity then we call it riba al-fadl
- when the unjustified increase is a deferment then we call it riba al-nasiah
The word unjustified in the definition of Qadi Abu Bakr refers to the nature of the transaction and its implicit conditions, for example:
- In an exchange (of money or any fungible good): neither deferment nor disparity is justified
- In a loan (of money or any fungible good): deferment is justified but disparity is not justified
- In a rental (of a non-fungible good): deferment and disparity are justified.
It is allowed to make a deferment when you exchange money but you have to call it a loan. If you call it exchange (sarf) then it is not allowed.
The Meaning of the Words “Usury” and “Interest”
The problem with the word “usury” is that its meaning has evolved within the English language and it has changed according to the legal changes introduced by the English people. When we look at any legal text prior to Bentham, for example, the catholic cannon law -which was for centuries applicable in England-, we find “some” similarities with our concept of riba. But when we move in time and we reach the modern usage of the word we find that the definition has lost its weight (it has changed) and meaning. Usury now means excessive interest in loans. The word “excessive” has conveniently never been defined. This is like defining adultery as excessive sexual intercourse.
We should use the word riba when referring to matters concerning Islamic Law even if we write in English language and we should admit that the definition of riba in Islam is more profound and richer than the definition of usury and therefore we should not treat riba as being synonymous of usury.
Interest on the other hand has something-to-do with riba, but it is not inclusive, not synonymous of riba. Perhaps the biggest misunderstanding modern Muslim have is to have made interest synonymous to riba. This has happened thanks to the intervention of the so-called Islamic banks who have used repeatedly the expression “interest-free” to define their practices. Interest is a mathematical term. But interest cannot serve to encompass the full meaning of riba. For example, riba al-nasiah (that is riba of deferment) has nothing to do with interest.
We should never use the word interest except to illustrate some cases of riba when interest applies, but never as a substitution or replacement of the word riba.
Is riba applicable to loans, whether is productive or commercial?
Of course it is applicable to any loan. In fact whether the loan has a productive intention or not from the point of view of the borrower is irrelevant to the matter of riba. Such distinction belongs to economic epistemology which takes root in the utilitarian definition of value of Bentham.
2 What is the definition of Qarz? Whether the term Qarz is synonymous with the term loan? In what meaning the term qarz has been used in the Qur’an.
Qard is loan without Riba. They are not synonymous. I believe we can use the word loan if we qualify its meaning, but we should not read into their use of the word loan anything except riba. In Qur’an the word loan is used in reference to Allah.
Translating qarz as “loan” without placing limits is problematic. Qarz in Qur’an implies loan without riba. In English loan includes any loan under any conditions. Therefore if we use the word loan it should always be qualified and what is more important we should always remember that the use of the word loan in capitalist societies is almost always inclusive of riba.
The word “qard” is derived from Arabic “qirad” which means ‘to cut’. It is called qard, as it cuts certain part of the lender’s property by giving loan to the borrower. Hasan is also an Arabic word, which originates from ‘ihsan’. Ihsan means kindness to others. So, hasan is an act which benefits persons other than those from whom the act proceeds without any obligation. The term al-qard al-hasan means beneficial loan or benevolent loan, gratuitous loan, interest free loan, beautiful loan, etc.
From the Qur’an
- Who is he that will lend to Allah a qard al hasan so that He may multiply it for him many times? And it is Allah that decreases or increases (your provisions), and unto Him you shall return. [Surah Al-Baqarah 2: 245]
- And give Allah qard al hasan. [Surah Al-Maidah 5: 12]
- Who is he that will give Allah qard al hasan? For Allah will increase it manifold to his credit. [Surah Al-Hadid 57:11]
- Those who give Allah qard al hasan, it will be increased manifold to their credit. [Surah Al-Hadid 57: 18]
- If you give Allah qard al hasan, He will double it to your credit and he will grant you forgiveness. [Surah Al-Tagabun 64:17]
- Establish regular prayer and give regular charity and give Allah qard al hasan—. [Surah Al-Muzzammil 73: 20]
From the Hadith
Abu Amama said that the Prophet [pbuh] said: “In the night of the journey, I saw on the gate of heaven written, ‘reward for sadaqah (charity) is ten times and reward for qard al hasan is eighteen times’. So, I asked the angel, how is it possible? The angel replied, “Because a beggar who asked might have already had something but a borrower did not ask for loan unless he was in need.” [Ibn Majah & Ibn Hisham]
Anas reported that the Messenger of Allah said: When someone of you gives a loan, and then he (debtor) sends present to him or carries him upon a beast – don’t ride on it, nor accept it unless it was prevalent between them previous to it. [Ibn Majah & Baihaqi]
Issues Relating to Qard
1. Islam recognises Qard al Hasan (gratuitous loan) only. Qard may be in any form i.e. in cash or in commodity, it may be big or small, it may be for personal needs of the debtor or for purpose of business, the loan shall be given without interest. The Prophet (pbuh) has even forbidden the creditor to accept any gift or any favour from the debtor after giving him loan as it would be considered riba unless the practice of exchanging gifts or accepting favours was prevalent between them previously.
2. Borrrowing without necessity is discouraged because indebtedness can ruin individuals. The precaution is patent by the severe warnings that have been given in case of debts left unsatisfied. All the sins of a martyr are forgiven except debt. The Prophet did not offer funeral prayer of a debtor who did not leave behind provision for payment of his debts. The greatest of sins with which a man shall meet Allah on the Day of Judgement is his debt outstanding at death for payment of which he leaves nothing. Keeping in view these warnings, great precaution should be taken in contracting debt.
3. Allah has made obligatory in the Qur’an on both the parties, creditor as well as debtor, to reduce the contract of debt into writing in the presence of two witnesses and settle terms and conditions regarding its repayment. The scribe is to write the contract according to the dictation of the debtor and in case the debtor is of unsound mind or minor, according to the dictation of his guardian. But in case a debt is contracted during a journey and no scribe is available, then the debtor should give some of his property in pledge to the creditor. The scribe and the witnesses owe duty to be fair in writing and giving evidence, while the creditor and debtor owe duty not to harm them in any way.
4. The lender can ask for some security in the shape of any asset or property from the debtor as a guarantee of repayment of loan. It is technically called mortgage or ‘Rahn’. The creditor is, however, strictly prohibited to make any profit out of mortgaged property because it would be usury. But he is allowed to drink the milk of or ride on the animal which is a pledge if he incurs expenses of its fodder.
5. Payment of debt is a first charge upon the estate of deceased before the estate is divided among its legal heirs.
6. The repayment of qard with excess voluntarily amount is lawful provided it is not a condition of the loan. It is not riba. According to Jaber, the Prophet owed him some debt and when he paid it back he paid excess.
7. Qard should be contracted with an intention of repaying it. According to a Hadith, whoever takes a qard with an intention of not returning it is a thief.
8. If a debtor is in straitened circumstances and not capable of repaying his debt, then, the best position for the creditor is to postpone his demand to the time until he is able to repay it. Even better for the creditor is to remit the debt as almsgiving, it would earn him high rewards from Allah.
9. Debtors are eligible for Zakat for discharging burden of their debts.
3 Whether the expression ‘Bai’ or sale which has been declared permissible in the Holy Qur’an, has any relevancy with the present interest based banking transactions? Whether these transactions are covered by the term “Bai’?
Ba’i is halal and has nothing to do with banking on several accounts. Banks use expressions such as product and trade in reference to their services but this is a misappropriation of the terms in line of Allah’s warning against those who say “riba is like trade”.
Ba’i is sale. Allah says in the Qur’an “Halla Allahul ba’ia wa harramar riba” (Allah has permitted trade but forbidden riba). The profit of ba’ia requires at least two transactions: the first buying at a certain price and the second selling at a different price. The different between the two transactions is the profit (or loss). That is halal. The profit in riba is made in a single transaction, such as charging interest in a loan. The increase is the profit in riba and is haram.
There is not riba in sales except for what is known as the prohibition of “two sales in one”. This prohibition is often referred as riba, in as much as it resembles riba. This practice of “two sales in one” appears in three forms:
1.-Selling on cash and reselling on credit to same person
Yahya related to me from Malik that he had heard that a man said to another, “Buy this camel from me immediately so that I can buy it from you on credit”. ‘Abdullah ibn ‘Umar was asked about that and he disapproved of it and forbade it. (Al-Muwatta, Chapter 31, Subchapter 33 [The Prohibition against Two Sales in One], 73)
This clearly resembles riba, because there is no intention of selling the goods, the only result is to cover a loan with interest.
2.-Two prices in one set of goods.
Yahya related to me from Malik that he had heard that al-Qasim ibn Muhammad was asked about a man who bought goods for 10 dinars cash or 15 dinars on credit. He disapproved of that and forbade it. (Al-Muwatta, Chapter 31, Subchapter 33 [The Prohibition against Two Sales in One], 74)
This also resembles riba. Malik explains in the Muwatta: “Malik said that if a man bought goods from a man for either 10 dinars or 15 dinars on credit, that one of the two prices is obliged on the buyer. Such a thing was not to be done because if he postponed paying the 10, it would be 15 on credit, and if he paid the 10, he would buy with it what was worth 15 on credit.”
3.-Two set of goods in one price.
Malik spoke about a man saying to another, “I will either buy these fifteen sa’ for ‘ajwa dates from you , or these ten sa’ of inferior wheat, or these then sa’ of Syrian wheat for a dinar, and one of them is obliged on me.” Malik said that it is disapproved of and was not halal. (Al-Muwatta, Chapter 31, Subchapter 33 [The Prohibition against Two Sales in One], 74).
Malik explains: “It resembled what was prohibited in the way of two sales in one sale.”
Also, there are other types of prohibitions regarding sales, such as gharar, selling only on credit, hoarding, dumping goods at a lower price, purchasing from a caravan before it arrives to the market, etc. These prohibitions are sometimes referred as riba in the Fiqh but only in as much as they resemble riba. The reason they resemble riba is because an unjustified advantage or increment is taken from these practices.
4 Explain “Riba-ul-Fadl with specific reference to its applicability in present day banking transactions.
Riba al-fadl is riba of disparity. It means to add an unjustified disparity between the value of the goods given and the value of the goods received, such as for example, charging interest in a loan.
Riba al-fadl has been discussed in the previous question. There is a conflict between the classical definition of riba al-fadl and the modernist interpretation of riba al-fadl by Islamic bankers.
We contend that any literature on the subject written in the last one hundred years is problematic and should be taken with suspicion of being compromised. Going back to the original sources is our way of finding the right answer.
What we have presented in this paper is the classical definition of riba al-fadl, that is the riba of disparity which occurs in those transactions in which disparity is not justified, namely, in exchange of money of the same kind (dinars for dinars or dirhams for dirhams) and in every loan with interest.
Riba al-fadl is therefore totally relevant to banking transactions since the routinely lend money with interest.
5 What is the illat or legal cause of the prohibition of Riba? What is the moral and legal aspects of its prohibition in the light of the Qur’an, Sunnah of the Holy Prophet and the views of jurists of various schools of thought? Whether the legal maxim “The Law (Al-hukum) spins (idur) with (ma’a) the cause of law (illatnya) whether there is a lack of law (juba) and (adima)” can be applied in the case of Riba?
The legal cause of riba is the unjustified increment. The legal consequence of this is that if you do not give up on riba, you should take notice that Allah and His Messenger have declared war on you. The prohibition of riba only is mitigated if the cause of riba, that is the increment is eliminated, that is, if riba does not exist.
The illat of riba is “creating an unjustified increment in the exchange”. The hikma of riba is to avoid wrong doing to others and to society. Those who have attempted to justify riba in the past have used the argument that in some cases riba does not harm the borrower. Then they proceeded to list those cases. In this manner they have come to the conclusion that if the borrower is going to benefit from using the money then it is acceptable to charge an excess; and also that if the interest is low then there is no harm. In order to argue this way they have to move away from the rules of the prohibition and turn it into something else, such as whether it harms or not. This was the argument of the christian reformers in the West who approved riba and the arguments of the pro-banking ulema among the Muslims.
The danger of this argumentation is clear in the work of John Calvin, who ended the usury ban in 1536. Calvin who is considered the first to introduce usury among the christians did not say that usury is permissible he only said that usury is permitted if he does not harm that person who is borrowing: he considered usury “sinful only if it hurts ones neighbour” and that it was generally permitted in business loans. That was enough to unleash riba among the christians. His argument was about the cause of usury not about usury.
We know for certain what is forbidden in the practice of the people of Madinah and this is what formulates the Law.
There is no classical reference to this kind of argumentation in the entire history of the fiqh. The stratagem of arguing in terms of the cause of Law regarding riba is an argument used exclusively by Islamic bankers whose intention is to justify banking.
Islamic bankers argue that basic cause (illat) of prohibition of riba is zulm (“neither you do wrong nor be wronged” – Qur’an, 2:279). According to them if they can prove that there is no zulm then the prohibition should not apply. There are two wrong assumptions in the above argument:
- Basic illat of the prohibition is zulm and not the act of doing riba.
- There is no zulm in the some Interest-based transactions
This argumentation is not different from the position of Calvin or Bentham.
Our position is that zulm is not the illat but the hikmat of prohibition
Illat is the basic feature of a transaction on which the application of the law depends. Hikmat is the wisdom behind the law Example: When the red light is on, every car has to stop regardless of whether there is traffic or not. Here the illat is the red light while the hikmat is the prevention of accidents. In a loan transaction the basic illat is the predetermined excess over principal, not the zulm.
This avenue of arguing should be contested as a false formula to allow riba through the back door. It must be rejected and those who have used it in the past exposed for what their intentions are which are open and visible in the creation of the so-called Islamic banking and the modernist Islamic finance.
6 The criteria set by the Constitution for the Federal Shariah Court to declare any law repugnant to Islamic injunctions, is the Holy Qur’an and the Sunnah of the Holy Prophet (pbuh); in the presence of the clear injunctions of the Holy Qur’an and Sunnah of the Holy Prophet (pbuh) what is the value of the views of contemporary Ulema regarding the legality or illegality of any issue?
The view of contemporary ulema is compromised by the legal restrictions imposed above them, the most important of which is the Constitution itself. Unless the Constitution and in particularly those elements of the Constitution that upheld riba (Central Bank, paper money and National Debt) are freely examine on the basis of Islamic Law, Islamic Law and the view of the ulema will remain constricted by the Constitution itself.
Since the days colonialism started and the consequent the fall of the Khalifate the opinion of the ulema has been compromised by ALIEN LEGAL restrictions. The introduction of Constitutional Law in Muslim lands was the work of the colonial masters. It purposely imposed a legal restriction upon the ulema in their application of Islamic Law. The constitutional order that followed WWII, was the means to established under the newly created international law (the “novo ordus seculorum” or the “new world order”) under the principles of secular and capitalist supremacy over religious law.
It must be understood all the Constitutions in the world have three common elements: Central Banks, Legal Tender (legal compulsion to use the unfulfilled promissory notes of the Central Bank) and National Debt (the obligation of all the citizens to pay for a debt they have not willingly incurred -even if the majority agrees to it). These three principles are necessary to their capitalist world order to function. They are all repugnant to Islam. But here is the trick: they are upheld by the highest law in the country, and therefore ANY INTERPRETATION OF ISLAMIC LAW MUST BE IN ACCORDANCE WITH THE CONSTITUTION.
Consequently ulema are not encouraged to discuss freely these issues or to speak against them under the threat of TREASON (this is not a light accusation). On the other hand, the opinion of those ulema who accept Central Banks, paper money (legal tender) and National Debt as part of the deen have been given in the past an encouraging political approval.
The safest way to reach decision is to take the authority from any book written more than one hundred years ago. The criterion is that the closest to the time of the Messenger of Allah (pbuh) the better. This is because the most authentic source of the deen is the city of Madinah at the time of the Messenger of Allah (pbuh).
7 Can the prohibition of Riba be applied on non Muslim citizens of Islamic State also? Can the prohibition of Riba be extended to the loans obtained from non Muslim States while the fact is that the laws of foreign countries, their national policies and international monetary laws are beyond the control of Pakistan?
Yes, it applies to all the citizens irrespective of religion or race. The prohibition extends to all loans and transaction in which we are a part whether national or foreign. Foreign and international Laws have always existed outside Dar al-Islam and they are not our concern. What is our concern is to REPUDATE any agreement made by any government in the past or present under Islamic Law.
The prohibition of riba is the liberation from riba. Riba robs, deprives, corrupts and degrades mankind independently of their religion or their race. It is a social crime that extends its evil beyond the limits of the parties involved in the contract. It affects all society and particularly punishes the poor. Our obligation to prohibit riba is our obligation to liberate mankind.
All the Prophets of the religions of the Book forbade riba. Only the trickery of those who say, “riba is like trade”, change the law of the people of the Book. We have been warned in the Qur’an against those tricksters. The obligation of the Muslims is to liberate our own people first, then to all the people in the land including the ahl al-dhimmah and then to the rest of mankind. Islam has no boundaries.
A distinction must be made between what is haram and what is not, and then what can be done and what cannot be done. Something is haram independently of whether we are capable of fulfilling the obligation or not. Therefore it is obligatory to declare riba haram. Then it is up to us to fulfil our obligation with the best of our abilities. But we must remember that Allah has declared war on riba and therefore the outcome of this war is clear. Victory belongs to Allah.
8 What is your opinion regarding the permissibly or otherwise of indexation keeping in view of the devaluation and inflation during the period of borrowing with specific reference to the juristic view of contemporary jurists.
Indexation is not a solution. It is a false solution.
Indexation is not a solution but the avoidance of the problem. The problem is the permanent devaluation and inflation of fiat money. Instead of indexation of a currency that has lost its ability to serve as a means of payment we should find what is the rightful means of payment in Islam. The answer is to reintroduce the gold Dinar and silver Dirham, the Shariah currency.
The gold Dinar and silver Dirham are mentioned in Qur’an and they are known as the Shariah currency. The weight of the Dinar was the mithqal which is equal to 4.25gr of gold and the weight of the Dirham was 7/10 of the mithqal. This is known as the standard of Umar ibn al Khattab, radhiallahu anhu. Together with the Dinar and Dirham, people in Madina used fulus, typically made of copper. Fulus is not money but only has a limited use a small change, and its value is dependent to the value of the dirham such as: 100 fulus equals 1 dirham.
In Madina money was a commodity and it was freely chosen without any government imposition, under the general ruling that oversees all trading relations, which is what Allah ta’ala says in the Qur’an: “trade with mutual consent”. Then we say to ourselves money must be also chosen with mutual consent. We know that gold and silver have the most common media of exchange for over 5,000 years of human history at the time in which the idea of imposing a currency to the people was alien to society. We believe that if freedom is restored people will chose gold and silver. This is not backwards, but this is the way of the best society in history.
The principle of mutual consent regarding trading is the key factor to understand money. Unlike paper money, commodities do not need to be backed by any authority. The value is the value of the coin. The coin is not a promise to pay, it is the payment. The role of the government is to assay the coin. The government has not authority to impose this or any other currency. Its function is to merely certify its weight and quality. People are free to use other commodities as means of payment. MONEY IS NOT MADE BY GOVERNMENT. Money is a choice. The fundamental ruling of Islam regarding money is therefore FREEDOM, freedom to choose.
Dates, salt, barley, and other commodities have been used by the people and they were money. They were regulated as money in concern to important matters such as riba, because they are money. Money in Islam is therefore represented by a basket of choices.
There is no inflation in freely chosen money models. First, this is because the production of gold and silver is limited by its physical appearance on earth. Second, this is because money is not imposed upon people by legal means (like the Legal Tender Laws) and thus fluidity between different commodities is granted. This fluidity moderates the natural fluctuations in market pricing. The fact is that a chicken at that time of Rasulullah (pbuh) cost one dirham and today we can be a chicken for approximately one dirham. After one thousand and four hundred years the price remains the same. This is because commodities vary in prices but do not have inflation. Inflation is a phenomenon exclusive to the supply of paper money.
Therefore the answer is not to index prices to prevent inflation risks, but to change the money that causes inflation.
A question comes across as to whether the introduction of gold and silver coins is compatible with the present constitutional legal systems that we have today and which grant the monopoly of issuing money to the Central Banks. The answer to this question is that it is compatible. This has been done in Malaysia within a similar constitutional frame as in Pakistan. The crucial points to introduce the Shariah coins in Pakistan are:
- The Shariah coins are not legal tender. There is no imposition in the usage and acceptance of the coins.
- The Shariah coins are not “authorized” by government, the function of government bodies is limited to assaying the coins, such in the same way, 1kg of potatoes can be certified in its correct weight.
- The Shariah coins are necessary for the performance of critical matters regarding the deen, for example, the payment of zakat.
- The injunction of “trade with mutual consent” makes any imposition of currency upon people, whether the currency is a promissory note or a commodity, Islamically unacceptable.
- The Shariah coins are a line of defence for the poor people against inflation. They are good for people.
- Gold and silver coins represent a sound currency, stronger than the US dollars, as a means of international trading. The Dinar and the Dirham as common currency are a first step towards the unity of the Muslim Nation. They are good for Pakistan.
9 What is meant by “Ra’as ul Mal” as appeared in the Holy Qur’an? It is fact that the value of the paper currency has a trend of decrease in the inflationary situation. If a debtor who has borrowed a particular amount of paper currency repays the same amount to his creditor after a lapse of substantial time, the creditor can suffer the effects of inflation. If he demands his debtor to pay more in order to compensate him for loss of value, he has suffered, can this demand be treated as a demand of Riba?
Ra’s al-mal is the principle capital. In the Qur’an it appears as ruoosu amwalikum (2:279) and it refers to loans or sales in which riba is possible. To pay a compensation on the borrower for the loss of inflation incurred in paper money loans by the lender is not a valid solution, it is avoiding to find a solution.
Like in the previous question regarding indexing, paying compensation to the borrower for the loss of value due to inflation is only problematic. It does not solve the problem, but only pretends to solve the problem.
It is clear that the charging of interest is forbidden and cannot justify by the loss of value. Measures such as compensation can only be taken in consideration of specific and extraordinary circumstances and only in that particular case a Qadi can make a decision. Compensation cannot be used as a general way of dealing with inflation.
The situation resembles the conditions of darura, when extraordinary conditions come into place. If hunger presses the life of someone and only pork is available, eating the pork becomes fard. But darura does not entitle us to make a pig farm in order to eliminate hunger.
The conditions that cause the distress must be changed. In our case the acceptable position is to mint Dinar and Dirham and allow free choice to people. There is no inflation in Dinar and Dirham and therefore the need of compensation disappears.
10 Are the current fixed return modes like Murabaha, diminishing Musharaka, etc. as used/practised by the contemporary Islamic banks, in line with the higher purposes of Shariah? Whether these modes can be termed as real alternative of Interest?
They are not in line with the Shariah. Islamic bankers have changed the definition and practice of murabaha and musharaka. These modes as practiced by Islamic banks they are not alternative to interest but riba in themselves.
Islamic banking is haram. It is only a façade of Islamic principle when the mechanisms behind remain identical. Islamic banks practice, like all other banks, fractional reserve banking. Fractional reserve banking allows banks to lend money that they do not have. By creating credit through the issuing of loans, banks contribute to the money supply of the nation and thus to inflation.
Understanding Fractional Reserve Banking
Let us understand Fractional Reserve Banking. Here are some fundamental issues:
Since inflation is not a choice of people, and people do not have the freedom to choose any other currency, inflation is nothing but theft: a theft that harms the poor in particular. It needs to be understood that inflation does not tax people equally according to their wealth: the more money you have the more you lose with inflation. If it was that way then the richer will pay more. In fact the opposite is true. The reason is that inflation subsidizes those who are in debt, those who borrow. Those who borrow they have to pay less. But the majority of the borrowing is in the hands of few and rich. Those who borrow find that the interest that they have to pay is “subsidized” by the inflation. In fact borrowers are the only ones in society who benefit from inflation. If the inflation is 10% and the interest that needs to be paid is 10%, the borrower will have to pay no more than what he borrowed in the first place. In this way inflation subsidize the borrowers. In this way the poor are taxed to facilitate the borrowing of the rich. This is immoral.
Fractional reserve banking means that the banks can lend more money that what they really have. How can this be done? To understand this we need to understand the nature of money today. Most of the money in circulation exists only in electronic form. This electronic form of money is far superior to the money in the form of coins and bills issued by the State. This electronic money is entirely issued by private companies called banks.
What is the relative quantitative importance of these two forms of money: cash and electronic? In economics, the money supply or money stock, is the total amount of monetary assets available in an economy at a specific time. There are several ways to define “money,” but standard measures usually include currency in circulation and demand deposits (depositors’ easily accessed assets on the books of financial institutions).
The different forms of money in government money supply statistics arise from the practice of fractional-reserve banking. According to the Financial Times, Money Supply M0 and M1, also known as narrow money, includes coins and notes in circulation and other assets that are easily convertible into cash. Money Supply M2 includes M1 plus short-term time deposits in banks. Money Supply M3 includes M2 plus longer-term time deposits. Money Supply includes M3 plus other deposits. And the term broad money is used to describe Money Supply M2, M3 or M4.
Whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of money is created. This new type of money is what makes up the components in the M1-M3 statistics. In short, there are two types of money in a fractional-reserve banking system:
- central bank money (obligations of a central bank, including currency and central bank depository accounts)
- commercial bank money (obligations of commercial banks, including checking accounts and savings accounts)
In the United Kingdom there are just two official UK measures. M0 is referred to as the “wide monetary base” or “narrow money” and M4 is referred to as “broad money” or simply “the money supply”.
- Narrow Money: Cash (meaning the coins and bills) outside Bank of England + banks’ operational deposits with Bank of England.
- Broad Money: Cash outside banks (i.e. in circulation with the public and non-bank firms) + private-sector retail bank and building society deposits + private-sector wholesale bank and building society deposits and certificates of deposit.
In 2010, the total money supply (M4) measured in the UK was £2.2 trillion while the actual notes and coins in circulation were only £47 billion, 2.1% of the actual money supply, that is a ratio of almost 1:50. That means that for every one sterling pound in circulation in Britain in the form of paper money or coins, 49 are in electronic form.
In most developed countries the difference between narrow and broad money follows an average ratio of 1:20.
- In Japan M0 was 79,567.70 JPY Billion and M3 1,162,566.50 JPY Billion in Aug 2013. The ratio is 1:14.6
- In Australia M0 was 55,896 AUD Million and M3 was 1,572,677 AUD Million in July of 2013. The ratio is 1:28
If we take the average of 1:20, we can say that the majority of the currency in circulation is made by private banks as a result of fractional reserve banking. Now we need to understand the mathematics of this in relation to how the bank makes profit.
With an initial RS 1,000 the bank lends 20 times more, that is, RS 20,000 in electronic form, by opening a new deposit in favour of the borrower. Then the borrower pays 5% on the RS 20,000 and that is RS 1,000. The bank has obtained a 100% profit over the initial amount of RS 1,000.
The New Form of Riba.
Banking has changed the form of riba. Two main differences:
- The money of lending is different.
- The interest charged are significantly lower than in the past.
Money is now in the form of credit or promissory notes and it has a customary decreasing value because of inflation. Inflation invites those who can borrow. Borrowing becomes a protection against inflation. Those left out from borrowing suffer the full consequences of the loss of value in money.
In the classical days the interest charged by the usurers was very high up to 100% per month. Today the banks lend at a much lower rate. The reason for this is that the banks can lend more money than what they really have as we have seen above, so therefore even though they charge less to the individual borrower, the total amount of profit over the original capital is much higher, resembling the interest of the old days.
Here is the new paradigm. In the old days usury had a clear winner and a clear loser, the usurer and the borrower. Today it appears that not only the bank (the usurer) wins, but also the borrower wins -at least in some clear cases-, such as large industrialist who use the large capital to make economy of scale and obtain large profits. It seems that at least in some cases the win-win situation is established. So, who is the loser? The loser is the unaware masses who have to pay for the credit with inflation and substantial loss of competitiveness due to the huge accumulation of capital in the hands of few. The loser of the new form of riba are the people even though they think they do not participate in the transaction they are still involved because of their possession of legal tender. Paper money transmits the evil of usury to all its owners.
Murabaha and Musharaka
There are three fundamental objections to how the banks practice these two well-known contracts in Islamic Law.
- The framework in which they operate is wrong, that is, fractional reserve banking and the use and creation of legal tender (M3).
- The contracts have been altered in a manner that is not acceptable in order to fulfil a function of finance. None of them are financial contracts.
- Islamic banks have prevented the practice of the real contracts by spreading a new methodology of practicality over orthodoxy.
Briefly our objection against the use of these contracts is as follows:
- Murabaha is a sale contract it is not a financial contract.
- Musharaka requires involvement in the management of the business. Capital can make partnership with capital; labour can make partnership with labour; but capital cannot make partnership with labour because it has not right over the work of others. In Islamic Law labour has prevalence over capital.
A comprehensive discussion of these two issues has been presented in the attached document “Muamalaat. The Alternative to the Riba System Exists”. Our argument is that murabaha and musharaka have been “reformed” to fit banking practices.
11 What are the objectives of Islamic finance? Does the modern Islamic finance fulfill these objectives?
The objective of Islamic finance is to please Allah by following His Commands. Modern Islamic finance does not fulfil that objective.
The primary objective of Islamic finance is one: to please Allah. Secondarily, the objectives are to obtain profit to the investor and the agent and to benefit society by providing investment to trading and only trading. Modern Islamic finance in the hands of Islamic bankers has totally altered finance.
The problem is that we are dealing with two conflicting elements: one is the practice of an economic and social model -in which we live today-, that is alien to Islam (riba is everywhere) and then with the Islamic Law that was written to serve a complete different type of economic social model -which has now disappeared. Some people have opted for reforming Islam in order to accommodate it to the modern economic model, thus: Islamic bank, Islamic insurance, Islamic Stock Exchange, Islamic paper money, Islamic credit cards, and so on. We deny such reformist attempt because is defeatist and ignorant. What we propose is the reform of the economic model without any need to change the deen of Islam. In order to replace the present economic model we go back to our origins, Madina al-Munawara at the time of Rasulullah (pbuh).
We resent those who see Madina as a backwards society without the sophistication of our modern ways. These people have been the collaborators of our enemies to destroy Islam. Madina was a society in which their taqwa and their love of Allah were reflected in their way of living and viceversa. The wisdom and justice of the society of Madina will never be achieved again. It is the pinnacle of human history. It is nothing but natural that in the times of decadence we go back to Madina in search of inspiration and renewal. Madina was a model. That model is called Muamalat (not Islamic Economics).
The only form of capital investment allowed in Islam in which profit can be obtained without being involved in the business venture which produces the profit is Qirad or Mudharaba. Islamic finance is therefore limited to Qirad or Mudharaba.
In the past qirad was almost 99% related to the caravans. Without the caravans the practice of qirad becomes problematic. Our obligation is not to change qirad in order to meet new circumstances, but to reintroduce the caravans.
It is interesting to notice that the word “mudharaba” is a derivative of the Arabic infinitive, darb (travel), as in the expression darb fi l-ard, “to travel the land”. It is called Mudarabah because the agent earns his percentage of a venture’s profits as a consequence of the effort and labour he expends. The term Mudarabah is of Iraqi origin, and was the preferred term of Hanafi jurists to describe this particular form of arrangement because of its close semantic connection with the Quranic verse,
“…And others travelling (yadribuna) through the land (for the purposes of trade)” (Qur’an, 73:20)
This is a clear indication that the mudharaba was connected to the caravans and trading. The term used in Madina and also jurists of the Maliki and Shafi`i schools of law refer to this contract is Qirad or Muqaradah. The position of the majority and most authoritative ulema in all the schools is that Qirad is ONLY FOR TRADING. Therefore Islamic finance is financing trading.
This importance of trading in our fiqh has been dismissed by bankers who have placed financing above trading instead of the other way round. Our model is essentially a trading model, not a financial model. The meaning of this is that we need to reintroduce public markets and caravans, and we do not need banks but wadiahs and wakalas. A full discussion on these issues is offered in the attached document “Muamalaat. The Alternative to the Riba System Exists”.
12 What is the Islamic alternative to the present discounting of bills? Are the modes used/practiced by the Islamic banks for discounting are in line with the spirit of Islam?
The Islamic alternative to the present discounting of bills is to reintroduce our Shariah coins (dinar and dirham) among the Muslims and to restore the practice of the Muslims of issuing bill in the same currency (without any exchange) and without any intention of serving as a means of finance.
In capitalist countries the purchase of bills of exchange by banks before maturity is a common practice. The bank pays less than the nominal value of the bill, deducting a certain percentage for interest. At maturity, the bank collects the full nominal value from the drawee. The discounting of bills expands commercial credit which is enormously beneficial to the banks. At the same time, the discounting of commercial paper and especially of finance bills encourages speculation, increases the anarchy of capitalism, and hastens the onset of economic crises. Most important is totally haram.
The only acceptable way of dealing with bills of exchange is not to discount but to appoint an agent that can collect the monies on behalf of its customers for a fee. That is acceptable.
Some so-called Islamic banks such as Bank Islam in Malaysia have their own formula for what they call Purchase of Bills of exchange. No effort is made to differentiate with the practice of the non Muslims or to provide for a justification for doing it. They simply place their formula under the umbrella of being an Islamic bank. This can be seen in the Bank Islam Malaysia website.
Having said this we need to clarify what bills of exchange were in the Muslim societies of the past when Islamic Law was enforced. Bills of exchange (suftaja, plural safatij) did not involve currency exchange –as it was the case in Europe-, but instead were written in one region for payment in another of the same specie. A fee could be charged by the issuer upon issue, but the users of the bills could not profit off of the exchange transaction itself, as gaining off difference in exchange rates was and is riba and hence illegal. Thus, bills of exchange were rarely used for any purpose beyond their original intent –avoiding the costs and risks associated with moving money in international trade (such costs were far from trivial – it could cost about 10% of the total amount). Unlike in Europe, safatij were no employed as instruments of finance, and issuers were thus not provided incentive to expand their operations beyond the caravans and their trading routes.
In the West bills of exchange evolved further in the late-sixteenth and seventeenth centuries when they became negotiable and endorsable (the first examples of endorsement dates from the 1570s). As endorsable instruments, bills were similar to convertible money. Needless to say, this did not happened in the Muslim world until the colonial days and the constitutionalist reform in the aftermath of the fall of the Khalifate.
13 Are the priority banking services given to current account holders in conformity with the principles of the Shariah?
There is no difference in the priority banking service and the normal banking services in regard to their unlawfulness.
Any banking service which involves offering banking products is haram.
Here it follows an advert from Dubai Islamic Bank Pakistan:
“Dubai Islamic Bank Pakistan (DIBP) has launched the country’s first Islamic priority banking solution, offering customers ’a gateway to an exquisite banking experience’. A statement from the bank said DIBP’s specially designed priority lounges will provide its customers with a hassle-free banking experience with its dedicated relationship managers. Dubai Islamic Bank Pakistan is offering both a Priority and Platinum Banking solution.
Dubai Lounge Priority Banking caters to the affluent segment, offering a variety of privileges including fee based waivers, VISA Gold Card, access to VIP airport lounges in Pakistan and a higher cash withdrawal limit. Dubai Lounge Platinum Banking aims to be a symbol of exclusivity and unmatched benefits, providing high net worth customers with a variety of premium services including Pakistan’s First Islamic Platinum Debit Card. A complimentary Priority Pass service for Platinum customers offers access to over 600 VIP airport lounges globally.”
An Islamic VISA Gold Card? Gold VISA cards or Blue VISA cards does not change the nature of credit cards.
Calling Haram What is Haram
It is perfectly understandable that people and businessman in particular may require a VISA card for their transactions since nowadays, for example, hiring a car is almost impossible without a credit card. But why do we need to say this is Islamic, or to disguise it under the banner of an Islamic organisation? Let us call everything by its name: All banks must be required by Law to have the name HARAM inserted in their name, such as HARAM Dubai Bank or HARAM State Bank of Pakistan, just like we qualify restaurants or foods in Muslims countries that do not follow our halal standards. And like what we do with the tobacco adverts, every advert of the bank should have the name HARAM inserted in it; every bank check should have the name HARAM on it; and every promissory note or bill of exchange issued by a bank should have the name HARAM on it. And naturally the name Islamic should be removed from any bank or bank instrument. This will be in conformity with the Shariah.
14 If all transactions based on Interest are declared prohibited in Islamic injunctions, what procedure will be adopted with regard to previous foreign loans, past transactions and agreements with non Muslims and Muslim countries?
All transactions which are haram made by any government previous or present must be repudiated on the basis of Islamic Law.
To the extent that a nation allows its currency to depreciate in value and pays its borrowings in that currency, it is also repudiating part of its public debt, even if it is not doing so as openly as the United States did in 1933– 1934. Since March 1933 individuals have not had the right to demand gold coin for paper dollars, and on 15 August 1971, President Richard M. Nixon informed foreign central banks and treasuries that they had lost that right too.
Debt repudiation exists when a debt is unilaterally rejected, disputing the validity of a contract and refusing to honour its terms. While it does technically require consent, often times repudiation occurs when the debtor country refuses to make interest payments on their debt, and the creditor, in most cases the IMF, does nothing about it. At various times in the past, particularly in the nineteenth century and in the 1930’s, a number of nations have repudiated their debts. Nigeria, Argentina, and Iraq are a few nations who have had all or part of their debt repudiated in their history.
One of the most telling arguments that a nation might advance to support non-payment of debts would be that the nation had been enslave under, rather than represented by, its previous government. The previous government had privately appropriated the borrowed money rather than using it for public purposes. Therefore the borrowed funds had conferred no benefit on the general public on the general public and were no longer available to the nation. The loan, as an obligation of the populace, was essentially a fraud. The new government could argue that the lenders should have known better than to expect the citizens to honour such a debt after they had thrown off their yoke of servitude. Thus a government with the intention to apply Islamic Law will have the necessary argument to negate the Law as being a fraud on the citizens since National Debt is not allowed in Islam and it only has led to corruption.
The Case of Iceland
During the bubble years earlier in the last decade, the Icelandic economy was one of the world’s leaders in debt issuance per capita, and a highly leveraged financial sector helped make Iceland an economic superstar for many years. However, it also exposed the tiny country to the first tremors of the global financial crisis. When creditors panicked and started pulling money out of Iceland’s bank, the tiny economy was soon overwhelmed, and plunged quickly towards bankruptcy.
When faced with the insurmountable and reckless debts, a cascading recession, and the demands of the international political elite for more debt and austerity, the government of Iceland put it to their citizens. In early 2009, with a vote of 90%, Icelanders chose to default, leaving foreign investors, bankers and governments, holding much of the losses. The event stands as a stark reminder to the dangers of lending to overly indebted borrowers.
As a result of the default, the Icelandic Krona fell sharply, at one point dropping more than 70% against the euro. A recession of some 5% followed. However, as a result of its debt repudiation, the Icelandic economy did not die. In fact, in the ensuing two years, the Icelandic economy has shown signs of improvement. Indeed, Bloomberg has reported that, “Iceland is doing better than anyone could have hoped.”
“I wish it were possible to obtain a single amendment to our Constitution – taking from the federal government their power of borrowing.” — Thomas Jefferson