Usury in Islam
Although Islamic finance contains many prohibitions—such as on consumption of alcohol, gambling, uncertainty, etc. -- the belief that "all forms of interest are riba
and hence prohibited" is the idea upon which it is based.
The word "riba
" literally means “excess or addition”, and has been translated as "interest", "usury", "excess", "increase" or "addition".
According to Islamic economists Choudhury and Malik, the elimination of interest followed a "gradual process" in early Islam, "culminating" with a "fully fledged Islamic economic system" under Caliph Umar
Other sources (Encyclopedia of Islam and the Muslim World
, Timur Kuran), do not agree, and state that the giving and taking of interest continued in Muslim society "at times through the use of legal ruses (ḥiyal
), often more or less openly,"
including during the Ottoman Empire.
(Still another source, (International Business Publications), states that during the "Islamic Golden Age" the "common view of riba
among classical jurists" of Islamic law and economics was that it was unlawful to apply interest to gold and silver currencies, "but that it is not riba
and is therefore acceptable to apply interest to fiat money -- currencies made up of other materials such as paper or base metals -- to an extent.")[Note 2]
In the late 19th century Islamic Modernists
reacted to the rise of European power and influence
and its colonization of Muslim countries by reconsidering the prohibition on interest and whether interest rates and insurance were not among the "preconditions for productive investment" in a functioning modern economy. Syed Ahmad Khan
, argued for a differentiation between sinful riba
"usury", which they saw as restricted to charges on lending for consumption, and legitimate non-riba
"interest", for lending for commercial investment.
However, in the 20th century, Islamic revivalists/Islamists/activists worked to define all interest as riba
, to enjoin Muslims to lend and borrow at "Islamic Banks" that avoided fixed rates. By the 21st century this Islamic Banking movement had created "institutions of interest-free financial enterprises across the world”.
The movement started with activists and scholars such as Anwar Qureshi,Naeem Siddiqui
, Abul A'la Maududi
, Muhammad Hamidullah
, in the late 1940 and early 1950s.
They believed commercial banks were a "necessary evil," and proposed a banking system based on the concept of Mudarabah
, where shared profit on investment would replace interest. Further works specifically devoted to the subject of interest-free banking were authored
by Muhammad Uzair (1955), Abdullah al-Araby (1967), Mohammad Najatuallah Siddiqui
al-Najjar (1971) and Muhammad Baqir al-Sadr
The involvement of institutions, governments, and various conferences and studies on Islamic banking (Conference of the Finance Ministers of the Islamic Countries held in Karachi in 1970, the Egyptian study in 1972, The First International Conference on Islamic Economics in Mecca in 1976, and the International Economic Conference in London in 1977) were instrumental in applying the application of theory to practice for the first interest-free banks.
At the First International Conference on Islamic Economics, "several hundred Muslim intellectuals, Shari'ah scholars and economists unequivocally declared ... that all forms of interest" were riba
By 2004, the strength of this belief (which is the basis of Islamic finance)
was demonstrated in the world's second largest Muslim country—Pakistan—when a minority (non-Muslim) member of the Pakistani parliament[Note 3]
questioned it, pointing out that a scholar from Al-Azhar University
, (one of the oldest Islamic Universities in the world), had issued a decree that bank interest was not un-Islamic
. His statement resulted in "pandemonium" in the parliament, a demand by members of leading Islamist
political party[Note 4]
to immediately respond to these allegedly derogatory remarks, followed by a walkout when they were denied it. When the upset members of parliament returned, their leader (Sahibzada Fazal Karim), stated that since the Pakistan Council of Islamic ideology
had decreed that interest in all its forms was haram
(forbidden) in an Islamic society, no member of parliament had the right to "negate this settled issue".
The council's decree notwithstanding, over the years a minority of Islamic scholars (Muhammad Abduh
, Rashid Rida
, Mahmud Shaltut
, Syed Ahmad Khan
, Fazl al-Rahman, Muhammad Sayyid Tantawy
and Yusuf al-Qaradawi
) have questioned whether riba
includes all interest payments.
Others (Muhammad Akran Khan) have questioned whether riba
is a crime like murder and theft, forbidden by sharia
(Islamic law) and subject to punishment by human beings, or simply a sin to be inveighed against, with the reprimand left to God, since "neither the Prophet nor the first four caliphs
nor any subsequent Islamic government ever enacted any law against riba
A Jordan Islamic Bank branch in Amman
like Mohammed Naveed insist Islamic Banking is "as old as the religion itself with its principles primarily derived from the Quran", secular historians and Islamic modernists see it as a modern phenomenon or "invented tradition
According to Timur Kuran, by "the tenth century, Islamic law supported credit and investment instruments" that were "as advanced" as anything in the non-Islamic world, but prior to the 19th century there were no "durable" financial institutions "recognizable as banks" in the Muslim world. The first Muslim majority-owned banks did not emerge until the 1920s.
An early market economy
and an early form of mercantilism
, sometimes called Islamic capitalism
, was developed between the eighth and twelfth centuries.
The monetary economy
of the period was based on the widely circulated currency
the gold dinar
, and it tied together regions that were previously economically independent.
A number of economic concepts and techniques were applied in early Islamic banking, including bills of exchange
, including limited partnerships
, or mudaraba
), and forms of capital
), capital accumulation
, promissory notes
), transactional accounts
Muslim traders are known to have used the cheque or ṣakk
system since the time of Harun al-Rashid
(9th century) of the Abbasid Caliphate
. Organizational enterprises
independent from the state
also existed in the medieval Islamic world, while the agency
institution was also introduced during that time.
Many of these early capitalist concepts were adopted and further advanced in medieval Europe
from the 13th century onwards.
In the middle of the 20th century some organizational entities were found to offer financial services complying with Islamic laws. The first, experimental, local Islamic bank was established in the late 1950s in a rural area of Pakistan which charged no interest on its lending.
In 1963, the first modern Islamic bank on record was established in rural Egypt
by economist Ahmad Elnaggar
to appeal to people who lacked confidence in state-run banks. The profit-sharing experiment, in the Nile Delta
town of Mit Ghamr
, did not specifically advertise its Islamic nature for fear of being seen as a manifestation of Islamic fundamentalism that was anathema to the Gamal Nasser regime
. Also in that year the Pilgrims Saving Corporation was founded in Malaysia (although not a bank, it incorporated basic Islamic banking concepts).
The Mit Ghamr experiment was shut down by the Egyptian government in 1968. Nonetheless it was considered a success by many,
as by that time there were nine similar banks in the country.
In 1972, the Mit Ghamr Savings project became part of Nasr Social Bank, which as of 2016 was still in business in Egypt.
Publications available relating to Islamic Finance
|prior to 1979
Source: Islamic Finance Project Databank
The influx of "petro-dollars" and a "general re-Islamisation" following the Yom Kippur War
and 1973 oil crisis
encouraged the development of the Islamic banking sector,
and since 1975 it has spread globally.
In 1975, the Islamic Development Bank
was set up with the mission to provide funding to projects in the member countries.
The first modern commercial Islamic bank, Dubai Islamic Bank
, was established in 1979.
The first Islamic insurance (or takaful
) company — the Islamic Insurance Company of Sudan — was established in 1979.
The Amana Income Fund,
the world's first Islamic mutual fund (which invests only in sharia-compliant equities), was created in 1986 in Indiana.
From 1980-1985, Islamic investments underwent a "spectacular expansion" throughout the Muslim world, attracting deposits with the promise of "great gains" and "religious guarantees" supplied by Islamic jurists who were "recruited to issue fatwas denouncing conventional banks and recommending their Islamic rivals."
This growth was temporarily reversed in 1988 in the largest Arab Muslim country, Egypt, when the Egyptian state — worried that Islamist movements were building up a "war chest" and being given financial independence — reversed its tacit support for the industry, and launched a media campaign against Islamic banks.
The ensuing financial panic led to the bankruptcy of some companies.
In 1990 an accounting organization for Islamic financial institutions (Accounting and Auditing Organization for Islamic Financial Institutions
, AAOIFI), was established in Algiers by a group of Islamic financial institutions.
Also in that year the Islamic bond market emerged when the first tradable sukuk
— the Islamic alternative to conventional bonds — were issued by Shell MDS in Malaysia.
In 2002, the Malaysia-based Islamic Financial Services Board (IFSB) was established as an international standard-setting body for Islamic financial institutions.
By 1995, 144 Islamic financial institutions had been established worldwide, including 33 government-run banks, 40 private banks, and 71 investment companies.
The large US-based Citibank
began to offer Islamic banking services in 1996 when it established the Citi Islamic Investment Bank in Bahrain.
The first successful benchmark for the performance of Islamic investment funds was established in 1999, with the Dow Jones Islamic Market Index
Building housing the Islamic Banking & Finance Institute Malaysia (IBFIM) in downtown Kuala Lumpur
Also in the 1990s, a false start was made in Islamic banking in the UK, where bankers declared returns "interest" for tax purposes, while insisting to depositors they were actually "profit" and so not riba
. Islamic scholars issued a fatwa stating they had "no objection to the use of the term `interest'" in loan contracts for purposes of tax avoidance provided the transaction did not actually involve riba
, and the Islamic bankers used the term for fear that lack of tax deductions available for interest (but not profit) would put them at a competitive disadvantage to conventional banks.
Muslim customers were not persuaded, and a "bad taste" was left "in the mouth" of the market for Islamic financial products.
The Islamic Bank of Britain
, the first Islamic commercial bank established outside the Muslim world, was not established until 2004.
By 2008 Islamic banking was growing at a rate of 10–15% per year and continued growth was forecast.
There were over 300 Islamic financial institutions spread over 51 countries, as well as an additional 250 mutual funds complying with Islamic principles. Worldwide, approximately 0.5% of financial assets
were estimated to be under sharia-compliant management according to The Economist
But as the industry grew it also drew criticism (from M.T. Usmani among others) for not progressing from "debt based contracts", such as murabaha
, to the more "genuine" profit and loss sharing
mode, but instead moving in the opposite direction, "competing to present themselves with all of the same characteristics of the conventional, interest-based marketplace".
During the global financial crisis of 2008, Islamic banks were not initially impacted by the ‘toxic assets’ built up on the balance sheets of US banks as these were not shari’a compliant and not owned by Islamic banks. In 2009, the official newspaper of the Vatican
) put forward the idea that "the ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service".
(The Catholic Church forbids usury but began to relax its ban on all interest in the 16th century.)
However the drop in valuation of real estate and private equity – two segments heavily invested by Islamic firms – following the collapse of Lehman Brothers Islamic did hurt Islamic financial institutions.
As of 2015, $2.004 trillion in assets were being managed in a sharia compliant manner according to the State of the Global Islamic Economy Report. Of these $342 billion were sukuk
. The market for Islamic Sukuk
bonds in that year was made up of 2,354 sukuk issues, and had become strong enough that several non-Muslim majority states — UK, Hong Kong,
— issued sukuk.