Riba, Bank Interest and the Rationale of Its Prohibition

162 Pages·1.556 MB·English

by  the Islamic Development Bank

ISLAMIC DEVELOPMENT BANK
ISLAMIC RESEARCH AND TRAINING INSTITUTE

RIBA, BANK INTEREST
AND THE RATIONALE
OF ITS PROHIBITION

Visiting Scholars’ Research Series
No.___
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ISLAMIC DEVELOPMENT BANK
ISLAMIC RESEARCH AND TRAINING INSTITUTE

RIBA, BANK INTEREST
AND THE RATIONALE
OF ITS PROHIBITION

Mohammad Nejatullah Siddiqi

Visiting Scholars’ Research Series
No.___

JEDDAH - SAUDI ARABIA
1425H (2004)
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© Islamic Research and Training Institute, 2004
Islamic Development Bank
King Fahd National Library Cataloging-in-Publication Data

Siddiqi, M. Nejatullah

Riba, Bank Interest and the Rational of its Prohibition

Jeddah

150 P; 12½ x 19 cm

ISBN:__________

Legal Deposit No._________
ISBN:__________

The views expressed in this book are not necessarily those of the Islamic
Research and Training Institute or of the Islamic Development Bank.

References and citations are allowed but must be properly acknowledged.

First Edition
1425H (2004)
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ﻢﻴﺣﺮﻟا ﻦﻤﺣﺮﻟا ﷲا ﻢﺴﺑ
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CONTENTS

Page #
FOREWORD 9
PREFACE 11
INTRODUCTION 13
Chapter 1: ISLAM AND ITS LAWS 15
• Tawheed 15
• Shariah and its Objectives 17
• Maqasid al-shariah 18
• Justice and Equity 22
• The Individual 25
• Role of the State 27
• History 28
• Justice in Finance 30
• Islamic Rules for Exchange 31
• Conclusions 34
Chapter 2: PROHIBITION OF RIBA 35
• Quran on Riba 35
• Meaning and Incidence of Riba 37
• The Riba Owed to Abbas 38
• Reason of Prohibition 41
• Profits Versus Interest 45
• Quran’s Emphasis on Charitable Giving 48
• Prophet’s Implementation of The Prohibition of Riba 48
• Understanding of Law of Riba by Companions of the 51
Prophet and those who Followed
• Understanding of the Law of Riba Down the Ages 53
• The Issue of Bank Interest 55
• Arguments for Bank Interest 57
• Conclusions 63
Chapter 3: ECONOMY WITHOUT INTEREST 65
• Liability Side of an Islamic Bank 65
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• Capital Protection 67
• Assets of an Islamic Bank 69
• Sharing Based Modes of Finance 69
• Trade Based Modes of Financing 72
• Murabahah 72
• Murabahah Versus Interest 73
• The Problem of Default 74
• Other Asset Based Instruments 76
• Islamic Banking in the Private Sector 78
• Non Bank Islamic Financial Institutions 78
• Islamic Investment Companies 78
• Islamic Mutual Funds 79
• Islamic Insurance/Takaful Companies 80
• Stocks, Options, Derivatives and Risk Management 81
• Islamic Finance Under State Sponsorship 82
• Islamic Banking and Finance in South East Asia 82
• Islamic Finance in Bahrain. 84
• Islamic Finance in Sudan 84
• Iran, Turkey 85
• Pakistan, Bangladesh 86
• The Islamic Development Bank 87
• Islamic Finance and International Finance 88
• Conclusions 89
Chapter 4: ECONOMICS OF ISLAMIC FINANCE 91
• Relative Stability of Islamic Financial System 92
• Absorption of Real Shocks 94
• Stability in the Monetary Sector 96
• Exogenous Sources of Instability 96
• Relative Stability with Fixed Liabilities 97
• Limited Scope of Speculation in an Islamic Financial
System 100
• Relative Efficiency of an Islamic Financial System 102
• Uncertainty and Efficiency 105
• Meeting Uncertainty 107
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• Comparative Advantage 109
• Fairness of the Islamic Financial System 109
• Sharing Enhances Equity 111
• Growth with Islamic Finance 112
• Conclusions 113
Chapter 5: MEETING SPECIAL NEEDS 115
• Government Finance, Financing the Consumer, 115
Microfinance and Finance for Muslim Minorities
• Consumer Finance 115
• Islamic Modes of House Finance 116
• Credit Cards 119
• Financing Agriculture 119
• Government Finance 119
• Deficit Financing 123
• Muslim Minorities and Islamic Finance 123
• Conclusions 125
Chapter 6: MONETARY MANAGEMENT, INFLATION
AND INDEXATION 127
• Regulation and Governance 128
• Inflation 129
• Indexation 131
• Conclusions 136
Chapter 7: CONCLUSIONS AND PROSPECTS 137
• Future of Islamic Finance 139

BIBLIOGRAPHY 141
INDEX 157

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FOREWORD

The Visiting Scholars Program was introduced during 1413H as part of
IRTI’s multi-pronged efforts to develop Islamic economics and finance. The
program aims at enabling external scholars to visit IRTI on short-term basis in
order to carry out certain well-defined research task or project. We were
fortunate to have Prof. Nejatullah Siddiqui last year who kindly accepted the
invitation to come to IRTI under this program. A tangible benefit of his visit to
IRTI is this book.
IRTI felt that there was a need to explain riba, bank interest and the
rationale of its prohibition in modern terms to the general public and scholars
who are unfamiliar with the developing field of Islamic banking and finance.
Prof.Nejatullah Siddiqui also shared this feeling. He has therefore written this
book with this perspective. Starting from shariah and economic reasons for
prohibition of riba the book shows that this prohibition aims at preventing
injustice and promoting fairness, equity and efficiency. It then covers the entire
financial system, its various components as well as macro-monetary
management, and highlights the impact of prohibition of riba along with
alternative arrangements under Islamic system showing how the above
objectives are achieved. The clear and succinct writing style of the author will
help the reader gain understanding of the subject and the issues involved.

Acting Director
Islamic Research and Training Institute
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