Fatwa On Banking

FATWA
FATWA ON
BANKING
AND THE USE OF INTEREST
RECEIVED ON BANK DEPOSITS
BY UMAR IBRAHIM VADILLO
October 2006
Fatwa on Banking | The Use of Interest Received on Bank Deposits
Table of Contents
1. Introduction ........................................................................3
2. The Issue .............................................................................7
3. Understanding Riba ...........................................................10
3.1 A world shaped by Riba.................................................... 10
3.2 What is Riba? ................................................................. 11
4. The Misunderstanding of Riba............................................20
4.1. Religious reformism and capitalism ................................... 20
4.2 The Islamic Reformers ..................................................... 23
4.3 The followers of Reda ...................................................... 27
4.4 The misunderstanding of Riba an-nasiah today.................... 28
4.5 Equating Riba to interest in a loan ..................................... 33
4.6 Islamic Banking .............................................................. 34
4.6.1 Islamic Banks are banks ............................................. 34
4.6.2 Murabaha: what it is and what it is not ......................... 38
4.6.3 How the Islamic Bank’s version of the contract of Murabaha
came into being ................................................................. 41
4.6.4 The danger of making principles out of contracts............ 46
4.7 The Stages of the “Islamisation” process ............................ 48
4.8 On the methodology of modernism .................................... 49
5. Understanding Paper Money ..............................................54
5.1 Paper money backed by gold and silver .............................. 54
5.2 Devaluation in paper money ............................................. 60
5.3 Paper money with no backing, but only State legal compulsion
.......................................................................................... 61
6. The Islamic Mu’amalat.......................................................63
6.1 The Islamic business contracts .......................................... 65
6.1.1 Shirkat (Partnership).................................................. 67
6.1.2 Qirad (business loan) ................................................. 73
7. Conclusion: What to do? ....................................................76
7.1 Practical Steps ................................................................ 77
Umar Ibrahim Vadillo 2

1. Introduction
Riba (usury) has been clearly and explicitly prohibited in the Qur’an
and Sunna. Allah and His Messenger, sallallahu alayhi wa sallam, have
declared war on those who do not abstain from it.
These are some of the relevant ayats regarding Riba. Allah says in the
Qur'an:
Those who practice riba will not rise from the grave
except as someone driven mad by Shaytan's touch.
That is because they say, "Trade is the same as riba."
But Allah has permitted trade and He has forbidden riba.
Anyone who receives a warning from his Lord and then desists,
can keep what he received in the past and his affair is up to Allah.
But any who return to it will be the Companions of the Fire,
remaining in it timelessly, forever.
Qur'an (2, 274)
Allah obliterates riba but He makes sadaqa grow in value!

Allah does not love any persistently ungrateful wrong-doer.
Qur'an (2, 275)
O you who believe! Show fear of Allah

and forgo any remaining riba
if you are believers.
Qur'an (2, 277)
If you do not, know it means war from Allah and His Messenger.
If you turn in repentance you may have your capital,
without wronging and without being wronged.
Qur'an (2, 278)
O you who believe! Do not feed on riba,

multiplied and then remultiplied.
Show fear of Allah
so that perhaps you may be successful.
Qur'an (3,130)

Because of wrongdoing on the part of the Jews,

We made unlawful for them some good things
which had previously been lawful for them;
and because of their obstructing many people from the way of Allah,
and because of their practising riba when they were forbidden to do it,
and because of their consuming people's wealth by wrongful means.
We have prepared a painful punishment
for those among them who reject.
Qur'an (4, 159-160)
Rasulullah, sallallahu alayhi wa sallam, said the following concerning

the gravity of Riba:
Abu Huraira said that the Messenger of Allah, sallallahu alayhi wa

sallam, said: “Riba is of seventy different kinds, the least grave being
equivalent to a man marrying (i.e. having sexual intercourse with) his
own mother.”
(transmitted by Ibn Majah, Baihaqi)
Abdallah ibn Hanzala reported that the Messenger of Allah, sallallahu

alayhi wa sallam, said: “A dirham of Riba, which a man receives
knowingly, is worse than committing adultery thirty-six times.”
(Ahmad) Baihaqi transmitted it, on the authority of Ibn Abbas, with
the addition that the Prophet, sallallahu alayhi wa sallam, continued to
say: “Hell is more fitting for him whose flesh is nourished by the
Haram.”
(transmitted by Ahmad)
Abu Huraira reported the Messenger of Allah, sallallahu alayhi wa

sallam, as saying: “On the night I was taken up to heaven I came
upon people whose bellies were like houses which contained snakes
which could be seen from outside their bellies. I asked Jibril who they
were and he told me they were people who had consumed Riba.”
(transmitted by Ahmad, Ibn Majah)

Samura bin Jundab reported that the Messenger of Allah, sallallahu

alayhi wa sallam, said: “This night I dreamt that two men came and
took me to a holy land whence we proceeded on till we reached a river
of blood, where a man was standing, and on its bank was standing
another man with stones in this hand. The man in the middle of the
river tried to come out, but the other threw a stone at his mouth and
forced him to go back to his original place. Whenever he tried to come
out the other threw a stone at his mouth and forced him to go back. I
asked: “Who is this?” I was told: “The person in the river was one who
consumed Riba.”
(transmitted by Bukhari)
The Messenger of Allah, sallallahu alayhi wa sallam, cursed the one

who takes Riba, the one who gives Riba, the one who records the
transaction and the two witnesses thereof. He said they are equally
guilty.
(transmitted by Muslim)
There are of course alternatives to Riba. As Rumi once explained,

“What is Halal is possible.” The hypocrite – Rumi also said – is the one
who says, “What is Halal is not possible.” To establish the Halal is an
imperative for every Muslim. Among the Islamic alternatives for Riba-
based transactions are Shirkat (or Musharakah) and Qirad (or
Mudarabah). These are the two main business contracts in Islam. Their
principles are known. The problem is their application in an
environment that is not suitable for them.
The answer to this problem is not to alter the contracts but to

alter the environment.
Herein lies the main difference with our brothers in Islamic Banking.
They are preserving the capitalist environment and tools at the

expense of the conditions imposed by the Shari‘ah. They are doing this
wrongly in the name of ijtihad and darurah.
We, on the other hand, stand for the re-establishment of the Islamic
environment through the restoration of some missing key tools and
institutions of trading, which are necessary for Shirkat and Qirad to
operate properly.

2. The Issue
Many Muslims have interest-bearing accounts. Interest is without any

doubt Riba and therefore Haram. What are the circumstances in which
we find ourselves that force us to have bank accounts even though we
know bank accounts are Haram? How is it justified? Most people claim
that this is a case of darurah, that is, extreme necessity. Darurah is a
legal instrument applicable in cases of extreme necessity or vital
interest by which a person is allowed to act in a manner that would
otherwise normally be forbidden. The most critical characteristic of
darurah is that it is only a temporary measure. If you find yourself in
the desert and all you have is a pig to eat, then it is fard (obligatory)
to kill and eat the pig. Eating the pig is not Halal, it is fard. It is a very
different thing to start farming pigs while still claiming darurah. Once
we find ourselves in a situation of darurah, it is obligatory to do
everything in our power to move away from that situation. It is not
allowed to dwell in the situation for ever.
The issue we are concerned with here is “what to do with the interest
the Muslims are receiving on their bank deposits?” What is the correct
way of dealing with the interest, given the present circumstances?
Most people decide between the following options:
1] Keep the interest as part of the darurah situation

2] Give the interest to charity
3] Return the interest to the bank directly or arrange a special non-
interest account.
What all these options have in common is that they do not change the
status of darurah. They simply perpetuate the condition. Options 1 and
2 at least help the account holder or the charity beneficiaries; but
option 3 only enriches the bank, making it the worst possible option.

There is a fourth option which is the one we are proposing: to use the
interest to change the condition of darurah.
When a darurah status is claimed, the imperative action is to

change the condition not to perpetuate it. Therefore the priority is
to change the condition of darurah. The interest can contribute to
changing the status in which we find ourselves obliged to use the bank.
How? By establishing the appropriate alternative to the banking
system. Not another bank, but an institution that can allow payments
without resorting to banking activities. That institution should allow us
to perform payments and savings in an Islamic manner.
Darurah relates to our economic environment. Therefore to understand

our problem it will not be sufficient to focus on the commercial
transaction, we will need to have a wider look, examining the
conditions that surround the commercial transaction. Thus, we need to
investigate how banking institutions have become almost a monopoly
in the creation and handling of money. We need to look at the nature
of the banks, and also at the nature of the credit-money which we use.
Finally we need to understand what money is in Islam, and how we
can re-establish an Islamic economic framework in which banks will
cease to be a necessity for us, while we remain fully capable of
satisfying all our economic needs.
The key to understanding our present economic situation is the

concept of Riba in the Shari’ah. Without a proper understanding of
what is Haram we will not be able to make a correct judgement. To
understand Riba we will need to eliminate some common
misunderstandings, such as making interest identical to Riba – when in
fact the two concepts are not the same. Making these two concepts
identical is part of the confusion that reigns today in the common
discourse on Riba. Expressions such as ‘interest-free’ or ‘zero-interest’
do not mean that the transaction is free of Riba. Such expressions are
deceptive, misleading and ultimately have served to lure Muslims into

forbidden practices. We will look at this matter in the section called

‘Understanding Riba’.
Another important matter is to clearly state that Islamic Banking is

Haram, just as all other commercial banks are Haram without
exception. Islamic Banks practice Riba in the same way that other
banks do, except that the differences are purely cosmetic. They
mislead common people by the use of Arabic names and the
misrepresentation of commercial contracts as well as the introduction
of certain forbidden practices such as ‘two transactions in one’, which
are usually not known to be Haram by most people. Islamic Banks
dwell on the exceptionality of darurah in order to justify their own
interpretation of the Shari’ah, which validates banking practices.
Islamic Banks do not intend to change or eliminate the situation of
darurah, because such a change would imply the end of their
justifications. We will examine this matter in greater detail later when
we look at the methodological route used by modernist scholars in
order to alter the definition of Riba, therefore allowing them to accept
the institutions of banks and paper money.
Ultimately we must understand the importance of what is Halal, what

is the Islamic way of doing things. We have lost our Islamic Mu’amalat
and the only way to restore the practice of the Shari’ah is to restore
some critical aspects of the Islamic economic infrastructure that make
the Mu’amalat viable. Therefore the matter must ultimately result in
the restoration of our own economic model. Within an Islamic model
we have the resources to restore the right way of trading and
eliminate Riba form our lives.

3. Understanding Riba
3.1 A world shaped by Riba
It is generally assumed that from the point of view of material wealth,

things have never been better than they are today. This is assumed,
despite just having traversed the most murderous century in human
history, which saw for the first time the use of weapons of mass
destruction on civilian populations, the colossal annihilation of the eco-
system and fauna, and the largest numbers of starvation victims
known in history. All past and present miseries are forgotten before
the general assumption that the average person today enjoys a
standard of living not equalled in any other time. However, it has not
been the same for all the people of the world. While a material
improvement has been achieved for a relatively small portion of
mankind, the bottom half still lives below the poverty-line of 2 USD a
day, and earn less collectively than the 387 largest individual earners.
This disequilibrium in wealth goes hand in hand with a corresponding
political and military imbalance that has turned one nation in particular
into the police-ruler of the world.
During this period of a massive shift of wealth to a small corner of the

world, the Muslims have lost an immense part of their past economic
and political status. The political unity represented by the Khalifate,
which granted Muslims a voice in world affairs, was devastated, and
instead a plethora of tiny nations emerged under the auspices and new
legal frame of the United Nations. Large parts of our population belong
to the bottom half of world earners, and our combined Gross Domestic
Product does not reach one tenth of the GDP of the USA. Politically
divided, and losers in the economic share-out, Muslims face only the
prospect of being underdogs in the present economic system. Under
this regime a continuous erosion of our social and cultural life is

inevitable, which in turn results in the increased anger and frustration

of our youth.
This present system of economic disequilibrium is self-preserved by

diverting people’s attention away from economic matters and towards
political matters. The economic system which causes the imbalance is
taken for granted, and individual political tyrants become the focus of
political struggle. Under these circumstances the economic system
remains unquestioned and therefore its continuation is guaranteed.
At its core, this system of disequilibrium which we call capitalism is

based on Riba. Riba is in itself disequilibrium. Mechanised usury
through the banking system has turned a criminal contract into a
means of economic domination. As long as we remain slaves of Riba,
our Muslim nation will remain enslaved.
A society which misunderstands the dynamics of the world will find it

difficult to focus on establishing its goals. These are swept away in the
emotion of the moment. And so, acts which are intended ‘to do good’
are lost to a lack of direction. Under such circumstances, no amount of
effort will prove fruitful.
3.2 What is Riba?
Understanding Riba is essential to understanding capitalism and thus

to comprehending the economic environment in which we operate. The
Islamic understanding of Riba opens the path to restoring our own
Mu’amalat and thus creating the tools that can overcome the present
system. Riba is not just negative. It opens the path to the positive
construction of the Halal. Only while we remain confused between the
Halal and the Haram do we perpetuate the present situation.

The basis of the argument against Riba is what Allah says in the
Qur'an (Surat al-Baqara, 274):
“Allah has permitted trade and forbidden Riba.”
Riba represents the opposite of trading, it is the corruption of trading.

There cannot be trading with Riba, nor Riba with trading. Yet, Riba has
become the core of today’s face of kufr: capitalism. For this reason,
Riba is the most important political issue facing our Muslim nation
today. Riba affects every aspect of our life and it can be traced back to
two main institutions: the Bank and the State. Despite its importance,
most Muslims’ understanding of it remains superficial. Most people
simply think that Riba is merely interest. The reality of Riba is a much
more complex affair. This misunderstanding is not just a
miscalculation; it is the product of a mis-education and indoctrination
which has resulted from two phenomena: one, the destruction of the
political power of the Khalifate, and two, the process of the so-called
‘Islamic reform’ which followed. This misunderstanding opened the
gates to the ‘Islamisation’ of the most important institution of
capitalism: the bank. What the open market-place is to trading, the
bank is to Riba. A ‘reformed Riba’ was to allow the new promoters of
the ‘Islamic Bank’ to justify their actions. It is for this reason essential
to return to a correct understanding of this key term in the Fiqh, which
can allow us to discern what is Haram and what is Halal. This is crucial
to overcoming capitalism and its illusion of power.
This brief introduction will try to outline as plainly as possible the issue
of Riba in Islamic Law, and undo the misunderstanding created by the
‘reformers’ and modernist scholars.
Riba literally means ‘excess’ in Arabic. Qadi Abu Bakr ibn al-Arabi, in
his ‘Ahkamul Qur’an’, defines it as: ‘Any excess between the value of
the goods given and their counter-value (the value of the goods
received).’ This excess refers to two matters:

1] An extra benefit arising from unjustified increase in the weight or

measure, and
2] An extra benefit arising from unjustified delay.
These two aspects have led our scholars to define two types of Riba.
Ibn Rushd said:
“The jurists unanimously agreed about Riba in buyu’ (trade) that it is
of two kinds: deferment (nasiah) and stipulated disparity (tafadul).”
That is to say, there are two types of Riba:

1] Riba al-Fadl (excess of disparity)
2] Riba al-Nasiah (excess of deferment)
Riba al-fadl refers to quantities. Riba an-nasiah refers to time delay.
Riba al-fadl is very easy to understand. In a loan, Riba al-fadl is the

interest that is overcharged. But in general it represents when one
party demands an additional increase to the counter-value. One party
gives something worth 100 in exchange for something worth 110. Riba
al-fadl also refers to the forbidden case in which two sales transactions
are linked by a single contract (known as ‘two transactions in one’), in
which one party is obliged to sell something at one price and to resell
it after a time to the original seller for a decreased value. As a matter
of fact, this is only a subterfuge to disguise a loan with interest under
the pretence of a sale. Nobody needs this subterfuge today because
you can get the loan directly from the bank. But the Islamic Banks
have resorted to this old trick to deceive their customers under the
misinterpreted name of ‘Murabaha’.
Understanding Riba an-nasiah is more subtle. It is an excess in time

(delay) artificially added to the transaction. It is an unjustified delay.
This refers to the possession (‘ayn) and its non-possession (dayn) of
the medium of payment (gold, silver and foodstuff – which was used
as money). ‘Ayn is tangible merchandise, often referred to as cash.
Dayn is a promise of payment or a debt, or anything whose delivery or

payment is delayed. To exchange (safr) dayn for ‘ayn of the same

genus is Riba an-nasiah. To exchange dayn for dayn is also forbidden.
In an exchange it is only allowed to exchange ‘ayn for ‘ayn.
This is supported by many hadith on the issue. Imam Malik related:
“Yahya related to me from Malik that he had heard that al-Qasim ibn
Muhammad said, ‘Umar ibn al-Khattab said, “A dinar for a dinar, and a
dirham for a dirham, and a sa' for a sa'. Something to be collected
later is not to be sold for something at hand.”’”
“Yahya related to me from Malik that Abu'z-Zinad heard Sa'id al

Musayyab say, ‘There is usury only in gold or silver or what is weighed
and measured of what is eaten and drunk.’”
The Hanafi scholar Abu Bakr al-Kasani (d. 587H) wrote:
“As for Riba al-nasa’ it is the difference (excess) between the

termination of delay and the period of delay and the difference
(excess) between the possession (‘ayn) and non-possession in things
measured and weighed with different genera as well as in things
measured and weighed with a uniformity of genera. This is according
to ash-Shafi’i (Allah bless him), it is the difference between the
termination of the period and the delay in foodstuff and precious
metals (with currency-value) specifically.”
Riba an-nasiah refers particularly to the use of dayn in the exchange

(sarf) of the same genera. But the prohibition is extended to sales in
general when the dayn representing money overpasses its private
nature and replaces the ‘ayn as medium of payment.
Imam Malik, may Allah be merciful to him, illustrates this point in his
‘Al-Muwatta’:

“Yahya related to me from Malik that he had heard that receipts

(sukukun) were given to people in the time of Marwan ibn al-Hakam
for the produce of the market of al-Jar. People bought and sold the
receipts among themselves before they took delivery of the goods.
Zayd ibn Thabit, one of the Companions of the Messenger of Allah,
may Allah bless him and grant him peace, went to Marwan ibn Hakam
and said, ‘Marwan! Do you make usury Halal?’ He said, ‘I seek refuge
with Allah! What is that?’ He said, ‘These receipts which people buy
and sell before they take delivery of the goods.’ Marwan therefore sent
guards to follow them and take them from people’s hands and return
them to their owners.”
Zayd ibn Thabit specifically calls Riba those receipts (dayn) ‘which
people buy and sell before taking delivery of the goods.’ It is allowed
to use the gold and silver or food to make the payment, but you
cannot USE the promise of payment. In it there is an excess that is not
allowed. If you have dayn, you have to take possession of the ‘ayn it
represents and then you can transact. You cannot used the dayn as
money.
In general the rule is that you should not sell something which is there,
for something which is not. This practice is called Rama’ and it is Riba.
Imam Malik: “Yahya related to me from Malik from ‘Abdullah ibn Dinar
from ‘Abdullah ibn ‘Umar that ‘Umar ibn al-Khattab said: ‘Do not sell
gold for gold except like for like. Do not increase part of it over
another part. Do not sell silver for silver except for like, and do not
increase part of it over another part. Do not sell some of it which is
there for some of it which is not. If someone asks you to wait for
payment until he has been to his house, do not leave him. I fear rama’
for you. Rama’ is usury.’”
Rama’ is today the common practice in all our markets. Dayn currency
(paper money, receipts) has replaced the use of ‘ayn currency (Gold

Dinar, Silver Dirham). This practice is what Umar ibn al-Khattab meant
when he said “I fear rama’ for you.”
Selling with deferment is not restricted to metals, it also includes food.

Malik said, “The Messenger of Allah, may Allah bless him and grant
him peace, forbade selling food before getting delivery of it.”
Therefore, what is prohibited in Riba an-nasiah, is the addition of an

artificial delay that does not belong to the nature of the transaction.
What does ‘artificial’ and ‘the nature of the transaction’ mean? It
means that every transaction has its own natural conditions of timing
and price.
Riba al-fadl refers to quantities. Riba an-nasiah refers to time delay.
To understand what is justified and what is not justified, one has to

understand the different nature of each transaction, in particular those
transactions that involve the same genus (the same goods are given
and received), such as loans, exchange and rental:
• A loan involves deferment but not quantity disparity. One person

gives an amount of money, and after a period of time (deferment)
the person returns the money without increase. The excess in time
is justified and is Halal, but disparity is unjustified and is Haram.
That type of unjustified excess would be Riba al-fadl.
• An exchange involves no deferment and no disparity. One person

gives an amount of money and without deferment the equivalent
is given. Deferment is unjustified in an exchange. If you want to
delay the payment, you have to make a loan, you cannot obtain a
loan disguised as a ‘delayed exchange’. That type of unjustified
excess would be Riba an-nasiah.
• A rental involves both deferment and disparity and it is Halal.

When you rent a house, you take possession of the house and you

return it after a time (deferment) and in addition you make an

extra payment, the rent (disparity). These two excesses both in
time and quantity are justified and they are Halal. You can only
rent merchandise that can be hired. You can hire a car, a house or
a horse. But you cannot hire money or food stuff (fungible goods).
To pretend to hire money is to corrupt the nature of the
transaction and it becomes Riba. What type of Riba is renting
money? Riba al-fadl, because the renting of money is the same as
adding a disparity in a loan.
In the case of a sale that involves the exchange of goods of different

genus, deferment is Halal, and disparity is accounted for in a different
manner. How do you determine disparity in a sale of goods of different
genus? The disparity is determined by the difference between the price
offered on spot sales and delayed sales. This is called in the Fiqh the
stipulation of two prices or ‘two sales in one’. The spot price is
considered the price; and the excess occurs when there is an increase
(in relation to the spot price) in the price offered in delayed terms.
This can happen in the following cases:
• offering an increased price if the good are purchased on delayed
terms; or
• offering a discount if the buyer pays on the spot; or
• selling only on delayed terms and denying the possibility of
purchasing on the spot (thus hiding that there is an increase –
as it happens in many of the 0% finance offers that we see
today).
A complete discussion of this topic follows later. We will simply outline

two cases:
1] When the seller says “I sell at this price if you pay in cash, and at
this other one (higher) if you pay in delayed terms.”
2] When the seller makes a salam (a sale with delayed payment,
which is Halal) and at the time when the money is due he says to the
buyer (who might not be able to pay): “You can delay it further if you

pay an excess (disparity);” and also when the seller says to the buyer:
“If you pay before the end of the terms, I will offer you a discount
(disparity).” This is the type of Riba known as Riba al-jahiliyah. What
type of Riba is applicable here? Riba al-fadl – because in sales the
source of unjustified excess is disparity.
Ibn Rushd wrote:

“As for usury in sales, the ulama are in agreement that it is of two
types: deferred payment (nasiah) and disparity (tafadul) – except
what has been transmitted from Ibn ‘Abbas, who reported that the
Prophet, may the peace and blessing of Allah be upon him, said:
“There is no usury except in deferred payment.” The majority of the
fuqaha, however, have concluded that usury does exist in these two
types because this has been affirmed in other statements from him,
may the peace and blessings of Allah be upon him.”
“The four sections to which the law of usury may be reduced are (1)
things in which neither disparity nor deferment is permitted; (2) things
in which disparity is permitted but deferment is not; (3) things in
which both are permitted; and (4) what constitutes a single genus.”
Thus every transaction has its conditions relating to its nature. You
cannot take the conditions of one type of transaction and try to apply
them to the other, without corrupting the transaction. To add
unjustified conditions (also excess) to a transaction is Riba.
Since dayn is in itself a deferment, the use of dayn is restricted to

private transactions and it is prohibited as a general means of
payment (money). While dayn per se is Halal, it is not Halal to use it
as money. Dayn is a private contract between two individuals and
must remain private and between them. The transfer of dayn from one
person to another can be done Islamically, but only by the elimination
of the first dayn and the creation of a new one. The dayn cannot
circulate independently from what it represents. The owner must take
possession of the goods and liquidate the dayn. Dayn cannot be used

in an exchange and it cannot be used as a means of payment. It is

specifically forbidden to use dayn to pay Zakat.

4. The Misunderstanding of Riba
4.1. Religious reformism and capitalism
Capitalism overrides religion rather than interacting with it. Its

supremacy in present society is so absolute that expressions like
taxation and interest rates command more certainty than the
existence of Allah. Religions in the process have had to bend their
supposedly capricious laws in order to submit to the rationale of the
banking order. Coming out of revolutions, wars and economic disasters,
capitalism has managed to impose its structures all over the world. Its
success is so total that it has managed to eliminate any intellectual
resistance. The disappearance of the kings (representing the link to
traditional law) and the arrival of democracy provided the fertile
grounds for this massive re-shaping of the world within a capitalist
rationale.
The full extent of this accomplishment transformed the previously

untouchable domain of religion. Capitalism’s rationale entered into the
judgment of religion to the degree that capitalism was accepted as an
‘endowment of God’: a self-evident evolution of human society, just
like the locomotive or the radio. The key to this effort was the
adaptation of the traditional prohibition of usury through a careful
redefinition of the term. This ‘conversion’ to capitalism was completed
in christianity during the complex process of Reform or Protestantism.
The principal results of the conversion were the ‘christianisation of
banking’ and the reduction of Canon Law to personal puritan morality.
Muslims also had their own ‘protestant’ reform. Our reformers adopted
the same pattern; the adoption of puritan morality cantered
particularly on sexual behaviour, and the ‘Islamisation of banking’.

What we call modernism in Islam is similar to what Protestantism is to

the christian world. The two phenomena share the same mould and
the same accomplishment with regard to capitalism. At the centre of
this issue was a redefinition of the meaning of usury that would allow
banking to be accepted as part of the religion.
Two things were required for banking to be religiously accepted:

1] Acceptance of the interest charged on their loans, either explicitly
or by disguise.
2] Acceptance of fractional reserve banking, that is, the system of the
creation of promissory notes as substitutes for specie (originally, gold
and silver).
Canon Law, as inherited from scholastic writers and the fathers of the
christian church, regarded the matter of usury as being almost
identical to interest. This interpretation was already a departure from
the most comprehensive Aristotelian ‘paradigm’ that demanded that
the value and the counter-value must be identical. The Aristotelian
view was gradually abandoned in favour of a simpler and more
practical definition of ‘usury as interest’. Finally the Protestant
revolution redefined usury from being any interest (independent of the
amount) to only ‘excessive interest’. The Protestant interpretation
consented that any interest that was in accordance with the market
rate was permissible, and only the interest that was in ‘excessive’
disparity to the market was considered usury. But in practice, without
an upper limit beyond which people can agree that usury is taking
place, the definition has proved pointless.
The Aristotelian definition offers very close parallels to the Islamic view.
Qadi Abu Bakr ibn al-‘Arabi defines usury as: “Any unjustified
increment between the value of the goods given and the counter-
value.” The general idea is that although individuals have subjective
and distinct appreciations of goods, in a just transaction there must be
equivalence in their single (objective as opposed to subjective)
exchange value. Economists like Bentham argued against the

Aristotelian view on the basis of the preference of subjective value

(which was seen as the real value). From the point of view of the
subjective value the Aristotelian ‘just exchange’ does not make sense
since all the exchanges are by that definition non-equivalent. This is
because from a subjective perspective the parties involved in the
exchange always expect a higher ‘utility’ (subjective value) from the
goods received than from the ones given. Thus, from a utilitarian
perspective, “trade is as inequitable as usury”, which is like saying
“trade is the same as usury”. And Allah the Exalted has warned us of
the people who say “trade is the same as usury” (Qur’an 2:274).
After Bentham’s utilitarianism, all interest in whatever form was

considered permissible. The economic thinking that followed was
grounded upon Bentham’s ‘permissibility of usury’. Furthermore, from
this utilitarian perspective not only is usury accepted but the original
idea of equivalence is no longer relevant and is therefore ignored. This
explains the incapability of economists to understand the Islamic
definition of Riba, which is based on the intrinsic equivalence of a just
transaction. It leaves economists in pure perplexity when it comes to
understanding the Islamic sense of equivalence, as expressed in
sentences such as “gold for gold, hand to hand, equal for equal.” The
‘perplexity about equivalence’ is a factor common to all economists.
In Islam the word for usury is Riba. The meaning of Riba in the
Shari’ah has a more detailed and comprehensive meaning than the in
christian Canon Law. Aristotelian equivalence is expanded and
exemplified in the Shari’ah. The Shari’ah offers a complete
understanding of the commercial transaction, and by default of Riba.
This expanded understanding includes a detailed explanation of the
meaning of excess in its two forms: disparity and deferment. By
contrast the understanding of usury in the christian world is more or
less defined by interest only. Islamic Law is more comprehensive and
clearer. For example, in certain transactions in which it is not justified,
the introduction of an artificial (unjustified) deferment is seen as an
excess, and therefore a cause of Riba. This form of usury has escaped

all the christian scholars of the past. This gap in the christian
understanding was to have important consequences in how usury
would eventually penetrate in the christian world through the means of
banking and particularly the use of promissory notes (in themselves a
means of deferment). We want to emphasise the critical importance of
Riba an-nasiah as a means of recognising a significant form of Riba
which escaped christian scholars.
4.2 The Islamic Reformers
In Egypt, during the latter part of the XIX century, a group of pseudo-
scholars started their own Islamic version of a Protestant reformation.
Among other things they tried to change the definition of Riba in order
to accommodate the banking practices of their day. From Muhammad
‘Abduh to the modern pro-banking scholars there runs an un-
interrupted school of teachers and students, one which has added new
elements to the original Islamic definition, and subtracted existing
elements. This school we call modernism. Their final accomplishment
was the creation of the Islamic Bank.
The inspiration behind the modernist movement is said to have been

Jamal-ud-Din al Afghani (1839-1897), while its brain was Muhammad
‘Abduh (1845-1905), and the one who propagated it was Rashid Reda
(1865-1935). It first appeared as a rejection of Western colonialism,
but its emotional rejection of the West was accompanied by an
indiscriminate and equally intensive admiration of the West.
Because of his position as Grand Mufti of Egypt – a position granted to

him in 1899 by Lord Cromer, British Governor of Egypt – Muhammad
‘Abduh was the most damaging of all. His first Fatwa as Grand Mufti
stated: “Interest in saving funds is allowed”. He wrote (5 December
1903):

“The stipulated usury is not permissible in any case; whereas the Post
Office invests monies taken from the people, which are not taken as
loans based on need, so it would be possible to apply the investment
of such monies on the rules of a partnership in commenda.”*
[*commenda is similar to Qirad]
(Al-Manar, vol. VI, part 18, p. 717)
It is important to note that while he denounced Riba he accepted the

banks. This is a key motif of all posterior modernist scholars. With this
judgment he opened the door to the acceptance of banking in Islamic
Law. Although he never formulated the idea of an Islamic Bank – he
did not see it as necessary to call it Islamic – he established the basis
on which later modernist scholars would construct this far-fetched
formulation. The basis was re-interpreting interest as a type of profit,
such as in Shirkat or Qirad. This critical reinterpretation was achieved
by the introduction of a set of artificial definitions and deceptive
schemes.
Muhammad Rashid Reda was the founder of the magazine Al-Manar,

which was distributed all around the Muslim World. He participated in
the same constitutionalist and anti-Osmanli circles as Al-Afghani and
‘Abduh. He opposed the traditional Madhhabs to impose his own
opinions. He also bitterly opposed Sufism. His opinions on the West
and Riba are clearly exposed in his writing:
“There is nothing in our religion which is incompatible with the current

civilisation, especially those aspects regarded as useful by all civilised
nations, except with regard to a few questions of usury [Riba] and I
am ready to sanction [from the point of view of the Shari’ah]
everything that the experience of the Europeans before us shows to be
needed for the progress of the state in terms of the true Islam. But I
must not confine myself to a school of law, only the Qur'an and the
authentic Hadith.” (Al-Manar, vol. XII, p. 239)

The expression “except with regard to a few questions of usury [Riba]”

meant that, for example, he saw nothing wrong with taking up a life
insurance policy (Al-Manar, vol. XXVII, p. 346, also vol. VII, p. 384-8,
and vol. VIII, p. 588). He also decried the traditional jurists’ misuse of
Qiyas to extend to the area of prohibition on taking interest on capital
and suggests that the taking of interest on monies left in the bank or
post office does not come under the prohibited usury. (Al-Manar, vol.
VII, p. 28).
Rashid Reda created a new classification of Riba that has become

paramount for all modernist scholars ever since. Reda made a
distinction in the legal treatment of what he called the “Riba of the
Qur’an” and the “Riba of the Sunna”. Reda maintained that the
primary form of Riba was the one prohibited by the Qur’an, and that
this prohibition is to be maintained at all times. The texts of the Sunna,
on the other hand, prohibit a lighter or secondary type of Riba –
according to him – which is generally prohibited but may be permitted
in case of necessity (darurah).
He essentially deprived Riba an-nasiah of its true meaning and

reduced it to something else. First, he maintained that the Riba
prohibited in the Qur’an was the Riba known as ‘Riba al-jahiliyah’
(when a person did not pay his due after the stipulated time, the seller
would increase the price) which he wrongly equated with Riba an-
nasiah. Second, he incorrectly assumed that Riba an-nasiah referred
only to loans, and also that it was only Haram when it involved
compound interest, and therefore that single interest was excluded
from the prohibition. He therefore concluded that simple interest
charged or paid by banks was not prohibited by the provisions of the
Qur’an at all, nor by the Sunna.
He also maintained that the remaining prohibition from the Sunna

referred to sales, in particular to barter exchange. And he wrongly
assumed that the Riba of sales and barter was Riba al-fadl. For
example, if two persons exchange gold with each other, the amount of

gold must be equal in weight on both sides and the two quantities
must change hands on the spot, at once. He argued that unlike the
Riba al-jahiliyah, this type was not known to the Arabs, since it was
difficult to conceive of why two persons would exchange equal
quantities of the same commodity at once. Here he showed his
“perplexity about equivalence” and consequently an ignorance of the
full extent of the issue of deferment. Thus he saw Riba al-fadl as being
part of the abandoned practice of barter when people would exchange
gold for gold (and similar), yet – he argued – it is not practiced any
more.
The famous hadith of ‘hand to hand’ and ‘equal for equal’ referring to
Riba has not been understood by the modernist scholars. They could
not understand the relevance of the argument and the form in which it
is described. Gold for gold, equal for equal and hand to hand, is a
description of the balance of the transactions. ‘Equal for equal’ refers
to the equivalence in the quantities which refers by default in certain
transactions to Riba al-fadl; and ‘hand to hand’ refers to the
immediateness of the transaction which refers by default in certain
transactions to Riba an-nasiah. It is a statement which specifically
prohibits the possibility of exchanging ‘gold which is not present’
(dayn) for ‘gold which is present’ (‘ayn). This is very relevant because
it is how Muslims got cheated away from their gold – by exchanging it
for false promises of gold (the original form of paper money). It
follows that in order to make paper money Halal, the modernist
scholars had to ignore the relevance of this hadith and this formulation.
The aforementioned hadith refers specifically to the exchange of

Dinars and Dirhams of different denominations, and implies the
impossibility of using promises of payment in the exchange. Both
cases are relevant and important to us.
In conclusion, Reda’s views were:

A] Riba an-nasiah was only Riba al-jahiliyya. And only compound
interest was forbidden by it.

B] Riba al-fadl was relative to the exchange. It was secondary in

nature and it could be accepted in case of necessity (darurah).
This in turn produced the following confusion:

1] Riba an-nasiah occurs in the excess disparity (tafadul) that takes
place in a transaction in which there is delay – such as loans.
2] Riba al-fadl occurs in the excess disparity (tafadul) that occurs in a
transaction in which there in no delay.
According to this view both types of Riba are created by the excess
disparity (tafadul) which we call Riba al-fadl. Therefore, in fact, they
did not see, or did not want to see, the case of Riba created by
deferment (nasa’), which we call Riba an-nasiah.
4.3 The followers of Reda
The followers of Reda basically adopted the same classification but

differed with him on the issue of compound interest. They agreed that
single interest was also Haram, but they agreed that darurah can be
applied. And they saw Riba al-fadl as being secondary, related to what
they saw as barter. Later modernist scholars filled the vacuum created
by their definition of Riba al-fadl by referring to monopoly, monopsony
and the rigging of prices in the market in general.
The truth is that both Riba an-nasiah and Riba al-fadl are prohibited by
the Qur’an. In fact the Riba of the Qur’an and the Riba of the Sunna
are exactly the same. The Sunna simply acts as a living commentary
on the Qur’an.
Taking from the basic classification of Riba the new pro-banking

scholars initiated a whole process of Islamisation of capitalist
institutions starting with the most important one: the bank. To
Islamise the bank, not only did interest had to be disguised, but also

the use of paper money. The disguising of interest was done through
several mechanisms, the most important of which was the re-definition
of Murabaha as a financial contract. The acceptance of promissory
notes was done through a careful redefinition of Riba which basically
replaced the meaning Riba an-nasiah with a new definition. How was it
done?
4.4 The misunderstanding of Riba an-nasiah today
Modern pro-banking ‘ulema have inherited the same ‘perplexity about

equivalence’ that has haunted economists since Bentham. They could
not understand the meaning of ‘gold for gold, equal for equal, hand to
hand’. They were misled to substitute the meaning of the sentence
with a simpler understanding of interest. In the process they ignored
two things: one, the comprehensive meaning of ‘equal for equal’ which
goes beyond interest; two, they completely ignored the issue of
deferment.
Their mistakes are basically the same as Reda’s. The first mistake is to
identify Riba with interest. They say that Riba and interest are the
same thing and can be used interchangeably. The second mistake is in
the classification of Riba which produces an inadequate understanding
of Riba an-nasiah.
Among these modernist ‘ulema, some have come up with an

altogether new classification:
The Riba of loans and the Riba of sales. These two are called ‘Riba al-
duyun’ and ‘Riba al-buyu’. Riba al-duyun refers to contracts in which
there is delay, such as loans and delayed sales. Riba al-buyu refers to
contracts in which there is no delay, such as normal sales and
exchange. Under this classification they insist in calling applying Riba
al-fadl to those transactions that occur in sales. And they identify Riba

an-nasiah with Riba al-jahiliyya and with the increase in loans. This is
exactly the same as the classification of Reda, except they are now
using new terms.
These modernists mistranslate the Ayat (2:275) saying that it means

“God has forbidden interest”. And they complete their
misunderstanding by endorsing literally the hadith that says “There is
no Riba except in nasiah.” According to us this hadith does not exclude
the other forms of usury.
According to them the prohibition of Riba an-nasiah essentially implies

that the Shari’ah does not permit interest. For them, the point in
question is “the predetermined positive return” (Chapra 1985, Towards
a Just Monetary System. Leicester: The Islamic Foundation. p. 57).
The prohibition of “predetermined positive return” – along with
“interest-free” – is another key aspect of their thesis, yet it cannot
substitute the true meaning of Riba.
What is important about this issue is that they equate Riba an-nasiah
with the loan, and it is removed from any meaning in the exchange
and other contracts. We will see later the implications of this.
They admit that there is a Riba al-fadl but they have also changed its
meaning. They say that Riba al-fadl is encountered in hand-to-hand
purchases and sales of commodities. It covers all spot transactions
involving cash payment on the one hand and immediate delivery of the
commodity on the other. This leaves them completely puzzled as to
the meaning of deferment in the exchange. They ignore the fact that
unjustified disparity (tafadul) when occurring in a loan is Riba al-fadl
as well. This vacuum is filled with their own definition of Riba an-
nasiah, which allows them to remove it from its true meaning. To give
a semblance of validity to their mistaken position, they quote all the
authorities and the hadith but they change the context and twist the
meaning of what type of Riba is applicable, thus derailing the
comprehension of the issue. In short, it is a complete swindle.

For example, they argue that from the prohibition of Riba al-fadl arises
the saying of the Prophet, sallallahu alayhi wa sallam, requiring that if
gold, silver, wheat, barley, dates and salt are exchanged against
themselves they should be exchanged on the spot and be equal and
alike. Although they admit that the mentioned six items performed the
function of money at that time, they do not draw any parallel with the
issue of money exchange. They say paper money is not part of the
prohibition because it is not one of the items mentioned in the hadith.
This is irrelevant because promissory notes either have a value as ‘ayn
or dayn. If it is ‘ayn their value is zero. If it is dayn, then they
represent a deferred payment which is not permissible in the exchange.
While explaining the significance of Riba al-fadl and why it has also
been prohibited, Chapra provides the following arguments: On the
surface it appears hard to understand why anyone would want to
exchange a given quantity of gold or silver or any other commodity
against its own counterpart, and that too ‘spot’. He says that what is
essentially being required is justice and fair play in spot transactions;
the price and the counter-value should be just in all transactions
where cash payment (irrespective of what constitutes money) is made
by one party and the commodity or service is delivered reciprocally by
the other. He says that any thing that is received as “extra” by one of
the two parties to the transaction is Riba al-fadl, which could be
defined in the words of Ibn al-Arabi as all excess over what is justified
by the counter-value. Therefore he argues that justice can be rendered
only if the two scales of the balance carry the same value of goods.
And finally he concludes that this point was explained in a befitting
manner by the Prophet, sallallahu alayhi wa sallam, when he referred
to six important commodities and emphasised that if one scale has one
of these commodities, the other scale also must have the same
commodity, “like for like and equal for equal”. He further continues to
argue that to ensure justice, the Prophet, sallallahu alayhi wa sallam,
even discouraged barter transactions and asked that a commodity for
sale be exchanged against cash and the cash proceeds be used to buy

the needed commodity. This is because it is not possible in a barter

transaction, except for an expert, to accurately determine the fair
equivalent of one commodity in terms of all other goods. Hence, the
equivalents may be established only approximately thus leading to
some injustice to one party or the other. The use of money therefore
helps reduce the possibility of an unfair exchange (Ibid, pp. 58-59).
This position eliminates the possibility of nasiah being part of the

exchange. He simply says that such transactions of gold for gold do
not occur any more and therefore the issue is irrelevant. The reality is
that they occur every day – every time a promissory note is used.
They only consider that what is forbidden is the interest in the loan
and the excess in the exchange of the same genus. Everything else is
ignored.
Following from the previous argument Chapra further concludes that

all commodities exchanged in the market would be subject to the
possibility of Riba al-fadl. He says that its prohibition is thus intended
to ensure justice and eliminate all forms of exploitation through ‘unfair’
exchanges and to close all back doors to Riba since, in the Islamic
Shari’ah, anything that serves as a means to the unlawful is also
unlawful. He argues that the Prophet, sallallahu alayhi wa sallam, also
equated with Riba the cheating of an unsophisticated entrant into the
market and the rigging of prices in an auction with the help of agents.
Thus, he says, the extra money earned through such exploitation and
deception is nothing but Riba al-fadl. Riba al-fadl, deprived of any
other meaning, becomes according to him any form of injustice, and
he cements his case with the hadith of the Prophet, sallallahu alayhi
wa sallam, who said: “Leave what creates doubt in your mind in favour
of what does not create doubt.” And also Khalif Umar who said:
“Abstain not only from Riba but also from Ribah” the latter literally
meaning ‘doubt’ which refers to income that has the semblance of Riba
or which raises doubt in the mind about its rightfulness. It covers all
income derived from injustice to, or exploitation of, others (Ibid, p.61).

Thus Riba al-fadl is completely redefined in terms of injustice and Riba

an-nasiah is pushed aside as merely concerning loans, where in fact it
does not fit except in the cases in which “debt for debt” is applicable,
that is, except in the case of repaying a debt with a debt.
Referring to Fakhruddin al-Razi, Chapra concludes that Riba an-nasiah

and Riba al-fadl are both essential components of the verse “God has
allowed trade and prohibited Riba.” And he says that while Riba an-
nasiah relates to loans and is prohibited in the second part of the verse,
Riba al-fadl relates to trade and is implied in the first part. He says
that injustice inflicted through Riba may be perpetuated through
business transactions, and Riba al-fadl refers to all such injustices or
exploitation. It requires absence of rigging, uncertainty, or speculation,
and monopoly and monopsony (Ibid, p.61).
Now, if we examine this sentence “Riba an-nasiah relates to loans” we

can understand the nature of their mistake. What Chapra and others
say is that nasiah refers to the Riba that occurs in transactions that
have delay (such as a loan), while the proper position is that Riba an-
nasiah is the “unjustified deferment” that occurs in any type of
transactions (it could occur in an exchange, for example). In fact,
although there is deferment in a loan, it does not constitute an
unjustified deferment. Deferment in a loan is Halal (except in the case
“debt for debt”). The cause of “unjustified excess” in a loan is disparity.
Therefore, deferment is not the cause of Riba in the case of a loan,
rather disparity is a cause of Riba. It follows that the type of Riba
which is associated with the charging of interest in the loan is Riba al-
fadl and not Riba an-nasiah.
This mistake is not just a simple mistake, it carries important

consequences. By redefining Riba an-nasiah, it loses its meaning. It
loses its ability to define the Haram which is inherent in unjustified
deferment. This will prevent Islamic Bankers from being able to
question the unlawful use of promissory notes in the exchange and

other transactions in which the use of dayn is unlawful. It follows that

this mistake is a back-door justification of paper money.
Islamic Bankers agree that interest charged by commercial banks “is

identical with the excess stipulated as an obligatory condition in the
contract, which is one of the two types of usury prohibited by Islamic
Shari’ah.” But they ignore any question about the possibility of Riba by
deferment in the exchange and other transactions, so critical to
understanding paper money. The Islamic Fiqh Academy established by
the Organization of the Islamic Conference (OIC) in its second session
held in Jeddah, Saudi Arabia, 22-28 December 1985, declared that
“any increase or profit on a loan which has matured, in return for an
extension of the maturity date, in case the borrower is unable to pay,
and any increase or profit on the loan at the inception of the loan
agreement, are both forms of usury (Riba), which is prohibited under
the Shari’ah” (Ausaf Ahmed 1995, The Evolution of Islamic Banking. In
Encyclopaedia of Islamic Banking, London: Institute of Islamic Banking
and Insurance. p.17).
In conclusion, the modernist classification reduces Riba to two issues:

interest in loans and any form of monopoly or monopsony, or rigging
the prices in the market. The first they arbitrarily call Riba an-nasiah,
and the second Riba al-fadl. This classification twists the meaning of
the two types of Riba and it ignores the vital issue of the use of paper
money in the exchange and by extension the whole matter of paper
money. In essence, their idea of Riba is interest on a loan.
4.5 Equating Riba to interest in a loan
Pro-banking scholars equate interest with Riba. According to them,

Riba refers to the premium that must be paid by the borrower to the
lender along with the principal amount as a condition for the loan or
for an extension in its maturity (Chapra 1985, p.64). In other words,

Riba is the predetermined return on the use of money. In the past

there has been dispute about whether Riba refers to interest or usury,
but there is now consensus among modernist scholars that the term
covers all forms of interest and not only “excessive” interest [as
previously believed by Reda and others] (Khan, W. M. (1985),
Towards an Interest-Free Islamic Economic System. Leicester,
Islamabad: The Islamic Foundation, The International Association of
Islamic Economics. p.52).
Modernist scholars have concluded that the most important

characteristic of Riba is that it is the positive and definite result of
money when changed. In other words, when money begets money,
without being exchanged for goods or services, it is called Riba. Its
basic characteristics, according to them, are:
1. It must be related to loan;

2. A predetermined amount of money is to be paid when due;
3. A time is fixed for the repayment; and
4. All these elements for repayment are taken as conditions for loan.
In this reductionist view the whole issue of deferment is ignored.
4.6 Islamic Banking
4.6.1 Islamic Banks are banks
The ultimate result of this deviationist view of Riba is the justification

of banking. Their premises are that ‘banking without interest’ is Halal.
In fact, although Islamic Banking defines itself as non-interest banking,
it actually charges interest, only with a different name. They call it

profit, sometimes dividends, sometimes mark-up through various

deceptive schemes. But apart from those deceptive methods of hiding
interest, the main problem remains that the Islamic Bank IS a bank.
Islamic Banks, like all banks, practice ‘fractional reserve banking’.
Fractional reserve banking is the essence of fiat money. Through this
method they use and create fiat money and consequently they
endorse the current system of paper money.
Firstly, in Islam, the person (in our case, the banker) who receives a
deposit (wadi’a) from another is not entitled to trade with it. This is
considered a transgression of the contract. In the past Muslims dealt
with payments directly on their own or through a complex network of
wakils, who did not create credit, they only executed the orders of
their customers, i.e. to make a payment or receive a payment. Money
and credit were not mixed. And the wakils did not use the money in
deposit for their own trading.
Secondly, in Islam you cannot use debts as money. In the case of

paper money which is not backed by specie (it is no longer a debt,
although it used to be), the banker is trading with receipts whose
value is due to the legal compulsion of the State. The present paper
money is in fact a tax. There is no way of allowing this in Islam. Not
only do the Islamic Bankers trade with paper money, they contribute
to the creation of more paper money through the creation of deposits.
It must be noticed that a bank deposit functions just like money.
To illustrate this point of the creation of money, we will give an

example. In Canada the figures published by the Bank of Canada
explain that by 1998 the ratio of all Canadian bank cash reserves
($3.893 billion) to their total assets ($1393 billion) had jumped to a
level of 1:358, a number which is unheard of considering that
historically, during the first 50 years of the 20th century, the ratio
never exceeded 1:15. That means for every dollar of cash in their
vaults or deposited with the Bank of Canada, the banks have conjured
up $357 from the gap that they have invested or lent out with interest.

This example shows that the banks are actually the main contributors
in the money supply of the nation.
What fractional reserve banking allows is for the bank to lend more in
the form of deposits than what it holds in the form of cash. So what
happens if everyone begins to feel nervous about the current system
of fractional reserve banking, and growing numbers of people
withdraw savings held in a bank? There is not enough cash. A bank
run occurs, as witnessed by the tragic events of the Great Depression
in the 1930s. For more recent events consider 1985, when numerous
regional banks in the north-eastern United States faced bankruptcy
due to a run on credit when individuals demanded a call on deposits.
We also witnessed a bank run just recently in Argentina, in 2001. The
police were called, and customers were refused entry into commercial
banks to withdraw savings. Elected officials and governments in
various countries have gone so far as to force the closure of banks, to
prevent a bank run from happening and causing a chain of events
which could become uncontrollable and essentially destroy the current
banking system.
The solution put in place once a bank has been closed is to use
everyone’s tax money through central banking insurance to eliminate
the problem until it occurs again.
States, by ‘protecting’ banks from bank runs by means of deposit

insurance, ultimately compound the problem by fractionating further
the central bank reserves on which the banks draw from to begin with.
The current banking industry is regulated in such a manner that a
legitimate cartel of money-makers has been created. The State
protects this banking cartel from the normal rationale and logic of the
contractual law.
Islamic Banks are no exception to this system. They are part of it.
They practice fractional reserve banking which is the basis on which
the majority of the money in circulation comes into being. They do not

have sufficient cash to back all the money generated. The excess is
incorporated into the economy as money supply which contributes to
the phenomenon of inflation.
The first idea of Islamic Banking derives from the ideas of ‘Abduh, who
equated the bank with Shirkat and Qirad. The principle that kick-
started Islamic Banking was the idea that investment banking – since
they do not give loans, they only invest – could be made Halal. They
argued that they do not charge interest because they invest their
money with other businesses. The only reform required, according to
them, in Islamising investment banking was not to pay interest to the
account holders. That did not signify a problem but rather another way
of making even more profit. So, according to them, investment
banking without paying interest to the account holders was Halal.
What the Islamic Bankers cannot avoid are the diseases of banking
practice, especially inflation. Since they cannot defend inflation from
an Islamic perspective, what they say is that the problem belongs to
the government, not the banks. This is not true. The governments
regulate inflation, but the main producers of money supply are the
banks, including Islamic Banks. When they are finally pressed on the
matter they argue in typical fashion by resorting to the concept of
darurah.
Naturally, the idea of the Gold Dinar and Silver Dirham (the Shari’ah
currency) is abhorrent to bankers, and this shamefully includes Islamic
Bankers – because banking cannot operate with a monetary regime of
pure gold and silver. They need paper money, whether being part of a
gold standard, or even better, with the new fiat money which the State
advocates. Islamic Banking is part of banking. It is Haram and its
practice is the most deceitful machination against Islam that we have
ever had in our history. Islamic Bankers have made the Haram Halal.
Their crime is therefore double. Firstly by using the Haram, and
secondly by altering the Islamic Law to justify their practices.

4.6.2 Murabaha: what it is and what it is not
This known sales contract in Islamic Law has been perverted at the
hands of the so-called Islamic Banks. Murabaha occupies between 80
to 90 percent of all Islamic Banking transactions. We could say that
without their version of Murabaha, Islamic Banks would not be able to
exist today. Under the label of Murabaha, which is a sale, Islamic
Banks portray a means of finance based on a well known forbidden
practice known as “two sales in one”. This practice of “two sales in
one” is a disguising mechanism which presents usury as if it was profit.
What do Islamic Banks say about Murabaha?
“Murabaha: Literally means mark-up. This tool is mainly used to

finance trade. Under this mechanism the bank purchases in its
own name goods that a buyer wants. It then sells the goods to
the buyer for a profit. The buyer settles the payment with the
bank in instalments.”
This description is what we call “two sales in one” and it is forbidden.

Imam Malik wrote in his Muwatta:
“Yahya related to me from Malik that he had heard that the
Messenger of Allah, may Allah bless him and grant him peace,
forbade two sales in one sale.”
“Yahya related to me from Malik that he had heard that a man

said to another, ‘Buy this camel for me immediately so that I can
buy him from you on credit.’ ‘Abdullah ibn ‘Umar was asked about
that and he disapproved of it and forbade it.”
Before we examine this matter in detail we will look at the true

meaning of Murabaha. In our Fiqh the contract of Murabaha is a sale
contract, which means that there is an offer and an acceptance of the

price of a particular item of goods in a single transaction. The typical

disputes rising from the Murabaha contract are related to the definition
of the basic price on top of which he adds his mark-up. In a Murabaha,
the basic price is linked to the final price. The mark-up used as an
example in the Muwatta of Imam Malik is 10%. Malik makes the
following example of a man selling goods in Murabaha:
“If a man sells goods worth one hundred dinars for one hundred
and ten”
In a normal sale, the seller is not obliged to state the price he paid for
the goods originally, but in the Murabaha you state the original price
plus the mark-up.
“If someone sells goods in Murabaha and he says, ‘It was valued
at one hundred dinars to me.’
The normal practice consisted of a seller buying the goods in a city and
then going to another city to sell in Murabaha saying: “It was valued
at so and so and I am selling it for so and so” or simply stating “I am
selling with a 10% mark-up”
In the traditional Murabaha, the goods are in the possession of the

seller before he makes the offer. In the so-called Murabaha of Islamic
Banking, the buyer comes to them and says, I want to buy such and
such. Then the Islamic Bank goes and buys it in cash and sells it to the
client for the price plus a mark-up in delayed terms. This practice is
“two sales in one” and it is forbidden.
The critical matter of Murabaha that occupies the attention of our

‘ulema is the definition of basic price, so that there is no abuse. There
are some expenses that are included in the basic price and there are
some others that are not included. When a cost is included then the
seller becomes entitled to make a mark-up on those costs.

Ibn Rushd explains this matter in the following way:
The majority of the jurists agreed that sale is of two kinds: Musawana
and Murabaha. Murabaha takes place when the seller declares the
price for the buyer from which he had bought the goods, and then
stipulates some profit in dinars or dirhams.
Ibn Rushd analyses all the discrepancies on this matter in his Kitab al-
Murabaha in the Bidayat al-Mujtahid. He raises all the issues
concerning what is allowed and what is not. In general it is permissible
for the seller by the way of Murabaha to buy in delayed terms and also
to sell in delayed terms. There is only one element to consider as
explained by Ibn Rushd:
Malik said about the person who bought goods for credit for a period
and sold them by way of Murabaha, that it is not permitted to him
unless he discloses the period. Al-Shafi’i said that if this takes place,
the buyer would have a period (of credit) similar to his.
What this means is that the contract of Murabaha is regulated. That

what is considered the initial price (basic price) upon which the mark-
up (the profit) is fixed, is well defined. The basic price includes the
price paid and all the costs involved in the transport, etc, very similar
to the case of the agent of Qirad. The seller has to state these extra
costs to the buyer, and there is no harm in reducing them if it is
commonly agreed.
Murabaha is not a finance contract such as the Qirad is. Murabaha is a

sale and it is therefore regulated under the general laws that apply to
sales. What is forbidden in a sale is forbidden in a Murabaha sale, and
what is allowed in a sale is allowed in a Murabaha. The only difference
from a normal sale is the way of stating the pricing.

4.6.3 How the Islamic Bank’s version of the contract of

Murabaha came into being
Perhaps the most famous thinker of Islamic Banking is the Pakistani

scholar Taqi Osmani, who in an essay on Murabaha states:
"Murabahah" is, in fact, a term of Islamic Fiqh and it refers to a

particular kind of sale having nothing to do with financing in its
original sense. …
Murabahah, in its original Islamic connotation, is simply a sale.
The only feature distinguishing it from other kinds of sale is that
the seller in Murabahah expressly tells the purchaser how much
cost he has incurred and how much profit he is going to charge in
addition to the cost.
This is correct except that the sentence “how much profit he is going
to charge in addition to the cost” should read “how much profit he is
charging in addition to the cost”. The difference between future or
present is essential to understand how the sale actually takes place.
The first suggestion implies that there is an original pre-agreement
before the seller has purchased the items for sale, but this is not the
case.
The position of Taqi Osmani, like many other Islamic Banking scholars,
is that Murabaha stands as a principle, namely, the ability to state the
mark-up of a sale, and what they do then is to combine this principle
with a sale in delayed terms. What Islamic Bankers call Murabaha is
not Murabaha, but simply another form of Riba.
Taqi Osmani, like all Islamic Bankers, ignores the prohibition of “two
sales in one”. We will now examine this principle again.
The Prohibition of Two Sales in One

Ibn Rushd explains this issue in his Bidayat al-Mujtahid:
“A theme relevant to the subject in this chapter is the tradition

affirming that The Messenger of Allah, may Allah bless him and grant
him peace, proscribed two sales in one, according to the hadith of Ibn
‘Umar and those of Ibn Masud and Abu Hurayra. Abu Umar said that
all these have been transmitted by trustworthy authorities. The jurists,
therefore, agreed generally on the implication of this hadith, but
differed over the details – I mean the form to which the term is
applied and that which it is not. They also agreed on some of its forms.
This sale may take place in three ways:
-one is exchange of two priced commodities for two prices,
-another is exchange of a priced commodity for two prices, and a
-third is exchange of two priced commodities for one price, in which
case one of the two sales is binding.
The (sale of) two priced commodities for two prices is visualised in two
ways: first that one says to the other, “I will sell you this commodity
for such a price on the condition that you sell me that house for such a
price;” and second that he says to him, “I will sell you this thing for a
dinar or this other commodity for two dinars.” The sale of a single
commodity for two prices is also visualised in two ways: first, that one
of the prices is in cash while the other is on credit, and the second is
like one saying to the other, “I will sell you this dress in cash at such a
price on the condition that I buy it from you (on credit) for such a
period at such a price”. The (sale of) two commodities for a single
price is like saying to the other, “I will sell you one of these two for
such and such price.”
… If, however, he says, “I will buy you this dress for cash for so much
on the condition that you buy from me (on credit) with a period,” it is
not permitted unanimously (by ‘ijma), according to them (the jurists),
as it is one category of ‘ina, which is the sale by a person of what he
does not have and it also involves the prohibiting case of jahl about
the price.

Malik wrote in the Muwatta:
“Yahya related to me from Malik that he had heard that al-Qasim ibn
Muhammad was asked about a man who bought goods for ten dinars
cash or fifteen dinars on credit. He disapproved of that and forbade it.”
Malik said that if a man bought goods from a man for either ten dinars
of fifteen dinars on credit, that one of the two prices was obliged on
the buyer. Such a thing was not to be done because if he postponed
paying the ten, it would be fifteen in credit, and if he paid the ten, he
would buy with it what was worth fifteen dinars on credit.
Malik said that it was disapproved of for a man to buy goods from
someone for either a dinar cash or for a described sheep on credit and
that one of the two prices was obliged on him. It was not done
because the Messenger of Allah, may Allah bless him and grant him
peace, forbade two sales in one sale. This was a kind of two sales in
one.
All this proves that the practice of what the Islamic Banks call
Murabaha is forbidden. It is in fact not Murabaha, but two sales in one,
which is forbidden by the Messenger of Allah, may Allah bless him and
grant him peace.
The prohibition of two sales in one also includes a hideous practice

which has become common in our markets and which has been
endorsed by Islamic Bankers. It refers to those people who sell their
goods with two prices, one in cash and one on credit. This is Haram
and has to be eradicated. Either the seller sells for one price or the
other. If he decides to accept delayed payment, the price cannot
increase.

Taqi Osmani affirms that the transformation of Murabaha into finance,

and the consequent Islamisation of finance, are not correct in the
Shari’ah but only a temporal measure:
“Originally, Murabahah is a particular type of sale and not a

mode of financing. The ideal mode of financing according to
Shari’ah is mudarabah or musharakah which have been
discussed in the first chapter. However, in the perspective of
the current economic set up, there are certain practical
difficulties in using mudarabah and musharakah instruments in
some areas of financing. Therefore, the contemporary Shari’ah
experts have allowed, subject to certain conditions, the use of
the Murabahah on deferred payment basis as a mode of
financing. But there are two essential points which must be fully
understood in this respect:
1. It should never be overlooked that, originally, Murabahah is

not a mode of financing. It is only a device to escape from
"interest" and not an ideal instrument for carrying out the real
economic objectives of Islam. Therefore, this instrument should
be used as a transitory step taken in the process of the
Islamization of the economy, and its use should be restricted
only to those cases where mudarabah or musharakah are not
practicable.
However, the idea of a ‘transitory step’ has not been conveyed to their
customers. Customers are told that the practice of Murabaha is Halal.
The worst problem is that this practice is in reality a transitory step not
to an Islamic model, but to a further integration with the capitalist
system, which is what they call the Islamisation of the economy.
Islamisation of the economy is therefore not the transformation of our
surrounding capitalist reality, but the transformation of the Islamic
Law to suit capitalism.
Murabaha as practiced by Islamic Banks is a pure deception

Tariq al-Diwani wrote in his essay “Islamic Banking isn’t Islamic” (the
full article together with some other relevant material is available
online in http://www.islamic-finance.com/indexnew.htm)
“The contractum trinius was a legal trick used by European merchants

in the Middle Ages to allow borrowing at usury, something that the
Church fiercely opposed. It was a combination of three separate
contracts, each of which was deemed permissible by the Church, but
which together yielded a fixed rate of return from the outset. For
example, Person A might invest £100 in Person B for one year. A
would then sell back to B the right to any profit over and above say
£30, for a fee of £15 to be paid by B. Finally, A would insure himself
against any loss of wealth by means of a third contract agreed with B
at a cost to A of £5. The result of these three simultaneously agreed
contracts was an interest payment of £10 on a loan of £100 made by A
to B.
I had read about the contractum trinius some months before first
encountering the full documentation behind an Islamic Banking
Murabahah contract. It was the kind of contract that Person A might
use in order to finance the purchase of good X from Person B. The
bank would intermediate in the transaction by asking A to promise to
buy good X from the bank in the event that the bank bought good X
from B. With the promise made, the bank knows that if it buys good X
from B it can then sell it on to A immediately. The bank would agree
that A could pay for good X three months after the bank had delivered
it. In return, A would agree to pay the bank a few percent more for
good X than the bank had paid to B. The net effect is a fixed rate of
financial return for the bank, contractually enforceable from the
moment that the bank buys good X from B. Money now for more
money later, with good X in between.
The above set of legal devices is nothing other than a trick to

circumvent Riba, a modern day Islamic contractum trinius. The fact

that the text of these contracts is so difficult to come by is one

shameful fact of Islamic Banking. If so clean, why so secretive? The
following is an excerpt from a Murabahah contract that was used
frequently by two major institutions during the 1990's. The
'Beneficiary' is the client that needs finance, and earlier clauses require
that the Beneficiary acts as the agent of the Bank in taking delivery of
the goods.”
This deception is not acceptable in Islamic Law. It is simply a trick to

present something Haram as something Halal.
4.6.4 The danger of making principles out of contracts
Once contracts are transformed into symbolic principles, any

consequent interpretation will be completely deprived of Islamic ‘amal.
The result is that Islamic economics can intellectually free-float to
reach unprecedented realms of ‘Islamisation’ in accordance with the
general plan of the ‘Islamisation of capitalism’.
Using the work of people like Taqi Osmani, a legion of new Islamic
Bankers take his ‘ijtihad’ and build the basis upon which, through the
same methodology of principles, they move to the next layer of
‘Islamisation’. When it comes to the Islamisation of bonds and
derivatives, the original sources are completely forgotten. What is
used as the basis of reasoning is the “judgement” of the previous
generation of Islamic Bankers. The result is absurdity upon absurdity.
The ‘Islamisation’ of the futures market is the latest, yet not the final
move, of this unrestrained development of deception called the
‘Islamisation of the economy’. On this issue see A Juridical Rebuttal of
Taqi Osmani written by Hadhrat Maulana Mufti Habeebullaah of
Pakistan. Mufti Habeebullaah wrote:"

“I have made an in-depth study of Mufti Muhammad Taqi Uthmaani

Sahib's book, Islaam Aur Jadeed Ma' eeshat Wa Tijaarat (Islam and
Modern Life and Trade). I have concluded that Mufti Saheb has
embarked on an unsuccessful attempt to establish the capitalist
system with the aid of Islam and the Shari’at. While Islam has refuted
this system, Mufti Saheb has, on the contrary, endeavoured to make
Islam subservient to this (capitalist) system. But, we (Muslims) and
our social, political life and systems are all subservient to the Shari’ah.
Mufti Saheb has furthermore attempted, by the addition of the word
jadeed (modern), to present the system of the capitalists in the hues
of the Shari’ah. This endeavour envisages monetary gain for the
capitalists who will be led to believe that their gain is halaal profit.
They will thus make use of such profit without understanding a sin to
be sinful. This is truly loss in this world and in the Aakhirah.”
The technique used is the transformation of Islamic Law into abstract

principles devoid of their natural context and then the free application
of these principles by analogy into alien contracts. Thus this process is
considered to “Islamise a contract”. Below is an example of how
Mudaraba is symbolically interpreted as profit-sharing and Musharakah
as equity participation. The implication is that if Mudaraba is an
Islamic contract validated by the Islamic Fiqh, so is any form of profit-
sharing as a principle already existing in the capitalist world.
“This is a good argument if the impact of Mudarabah to mobilise

resources can be extended economy-wide or if Mudarabah-
Musharakah (profit-sharing & equity participation) financing
could be qualified as cooperative and active participation among
shareholders rather than being simply a management of idle
funds pooled by partners.”
(Prof. Dr. Masudul Alam Choudhury, Islamic Political Economy, a
critique of Islamic Economics. Published in Journal of Alternative
Political Economy. Vol I, No I, January 99; Penang, 1999, p. 9.)

This apparently harmless importation of economic terms has a double

implication. These imported terms simplify and replace the complex
nature of the contract within the Islamic ‘amal, in favour of principles
(which are de facto called Islamic principles) which tacitly carry all the
connotations and background of a different philosophy. Then, these
principles are used to label and justify other situations which may have
nothing in common with the original contract.
Mudarabah or Qirad is more than ‘profit-sharing’. It has many

obligations and restrictions in the context of the Islamic ‘amal which
are not covered by the term ‘profit-sharing’. Sharika or Shirkat is
different from ‘equity participation’. What is understood by equity
participation in capitalism and in Islamic law is completely different.
4.7 The Stages of the “Islamisation” process
The first part of the modernist/reformist ijtihad was conducted by

Muhammad ‘Abduh who legalised interest on the basis of its similarity
to other forms of profit-taking in Islam, namely Qirad. The modernist
analogy goes like this: the spirit of Qirad is to share profit from a
legitimate business, therefore, from a legitimate business we can offer
some form of ‘restricted profit’ or interest.
The second part of the Islamisation of Riba was the ijtihad of Hasan al-
Banna regarding the legalisation of dividends as legitimate profit. His
analogy consisted of saying that the spirit of dividends is just like a
kind of ‘practical profit’, although dividends are decided by majority
shareholders and they are independent of the results of the company.
The third part came with the development of Islamic Banking, among
whose authors we could mention Yusuf Qardawi (Ikhwan al-Muslimun
leader and Head of the Islamic Council of the Islamic Bank of Abu
Dhabi) and Khurshid Ahmad (Jamaat al-Islamiya leader and one of the
fathers of Islamic economics). They introduced the use of Arabic

names in order to conceal usurious practices. This process was the

most insidious imaginable. It implied an absolute rejection of Islamic
Law and its transformation by precarious analogy into ‘Islamic
principles’ suitable for reform, such as was done with Murabaha.
4.8 On the methodology of modernism
In fact, Islamic finance is a major laboratory for innovation by

modernists, who are determined by definition to remake or modernise
contemporary reality by Islamising it. It is a peculiarly fertile field for
innovation precisely because it is somewhat removed from politics and
hence from the political extremism associated rightly or wrongly with
Islamic ‘fundamentalism’. Inspired by Ahmad al-Najjar’s brief
experience in Nasser’s Egypt, the Organization of the Islamic
Conference (OIC) launched the Islamic Development Bank in 1973.
Then, beginning in 1975 with the Dubai Islamic Bank, scores of private
sector commercial Islamic Banks opened for business and competed
successfully with conventional banks, first in many Arab and then in
other Muslim and even non-Muslim countries. Despite their rapid
growth, however, they appear today to be stagnating.
Symptomatically the Dubai Islamic Bank required a rescue package in
1998, and a number of other Islamic commercial banks show signs of
stumbling. One of their basic problems is that they do not have an
adequate arsenal of financial instruments with which to compete with
conventional banks. Consequently they have encouraged financial
engineers and innovative legal scholars to contribute to the present
situation in the hope that they can obtain a ‘second wind’.
There have been basically two approaches to Islamic finance. One is to

take the macro approach of Islamic economics and “mine the classical
law corpus for fundamental Islamic principles” so as to draw
conclusions in terms of interest-free economies. The other approach is
the micro approach more or less in focus with Islamic law or Fiqh upon

the “concrete individual actions that have prime religious significance”

which then are transformed into Islamic principles ready for
implementation. The micro, formal, transaction-based perspective, is
the one that most influences the practices of Islamic Banking and
finance today. This is done by reducing the Fiqh to a few simple rules
that are usually incorrect as statements about the classical law.
Consequently, mixing the two approaches leads to confusion.
Economists retort that the findings of the ‘conservative’ legal scholars

ought to be rationalised, since vulnerable to charges of perpetuating
an opposition to Muslim progress.
Their preferred method for elaborating their fatwa and applying it to

contemporary circumstances are four: 1) by ijtihad or new
interpretation in light of the ‘principles’ of the Qur’an and the hadith;
2) by choice (ikhtiyar) among the views already propounded by past
scholars and adapted by a variety of possible criteria, including the
general welfare, or maslaha, to the present circumstance; 3) by
necessity (darurah); and 4) by legal artifice (which they often call hila,
pl. hiyal) or clever uses of law to gain legitimate ends.
While traditional legal scholars prefer to avoid ijtihad wherever they

can justify innovations by appeals to precedent, ijtihad is the preferred
method of the modernists, notably in contemporary deliberations
about options, which are financial instruments critical to any effective
future for Islamic finance. Professor Kamali, a celebrated Islamic
Economist, while calling for ijtihad, explicitly adopts the method of
choice and the criterion of the general welfare in his legal analysis of
these instruments.
The best example of the use of legal artifices is Murabaha. Murabaha –

as we analysed earlier – has been transformed into a means of
financing a sale by making two transactions into one. The latest
modernist scholars now argue that time value of money is a valid
argument (which it is not) but they reject making money from money.

Under this legal artifice, the bank financing a Murabaha sale must
actually buy the merchandise and then advance it to the buyer. In
practice, however, Islamic Banks in Pakistan, Malaysia and elsewhere
have devised another type of even more artificial Murabaha, whereby
the creditor immediately releases the merchandise to the buyer
without ever really possessing it or even fully identifying it. The Fiqh
Academy of the Organization of Islamic States has condemned this
practice, yet many Islamic Banks engage in such artifices and perhaps
lack the commercial expertise and warehousing capabilities literally to
fulfil the conditions of a ‘real’ banking Murabaha. The major portion of
outstanding credit extended by Islamic Banks takes the form of
Murabaha but the proportion of it that is artificial is unknown. Any
systematic attack on the artifice, however, could place the entire
Islamic financial movement in jeopardy. Out of necessity Islamic Banks
are in constant need of new financial instruments.
Darurah has been used as an instrument to Islamise capitalism. This

abuse of the use of darurah must be counteracted by the restoration of
the Halal, starting from the Zakat. The issue of Zakat is fundamental
to our Deen and fundamental to the restoration of an Islamic economic
life. Zakat cannot be paid in dayn. The argument against the
prescription of the Law is that under the present circumstances,
Muslims will be deprived of paying their Zakat if not in paper money.
Even if you accept this version of reality, Muslims cannot dwell in
darurah. The principle of darurah is a temporary excuse while every
possible effort is made to change the circumstances. Instead of that,
however, pro-banking ‘ulema use this Islamic principle of darurah to
justify the use of paper money. The reality is that Muslims cannot be
prevented from minting and using the Islamic Gold Dinar and Silver
Dirham. Using darurah in this way is an excuse which serves to
preserve the status quo. It is being used as a tool to make the Haram
Halal.
The ijtihad of the modernists is not ijtihad. Their ijtihad comes

associated with a rejection of taqlid, which is what they call ‘blind

following’ of the traditional Fiqh. It is simply another form of legal

artifice to make the Haram Halal. The key of their deviation is the
rejection of the traditional Fiqh, which is seen as medieval scholarship.
Instead they go directly to the Qur’an and the hadith. The texts
deprived of context or legal ruling are then transformed into Islamic
principles, such as the principle of no-interest, or the principle of legal
validity of time value, and then these principles are applied to anything
from bonds to derivatives, including options, swaps, shares, and also
credit cards, loans and debt trading.
The use of maslaha, or public benefit, is another of the tools of

Islamisation. Given adequate elaboration, public benefit could be
interpreted as anything. It has been argued that the use of paper
money is justified for public benefit. Why would you carry heavy gold
coins in your pocket if you can use lightweight paper money or an
even lighter credit card? Such an argument is used to justify the most
ludicrous aspects of the present capitalist society.
The issue of Islamic T-Bills is of critical importance not only for

monetary policy but also for the Islamic Banks, always in need of safe
havens for parking their excess liquidity. In this and other similar
issues there simply is no consensus as to what is or is not permitted in
the Islamic imagination of the Shari’ah Banking Boards. There is a full
spectrum of legal arguments and country practices. Virtually all
existing government securities are acceptable to some Islamic Banks
and not to others, depending upon the legal interpretations of their
respective Shari’ah boards. Thus the Malaysian Model, the State
models of Pakistan and Iran, and the Arab Islamic Model use different
criteria on these new issues. While the Malaysian Model has
accommodated Islamic Banks in a dual system of Islamic and
conventional banks, it is by no means evident that Malaysian practices
would prove Islamically acceptable in Arab countries. There is no
generally accepted Islamic formula for a relatively risk-free
government security.

Another standard building block of modern conventional finance is the

‘option’, a right without obligation to buy or sell something at a future
date at a specified price. Malaysian Professor Mohammad Hashim
Kamali has presented a ‘provocative’ legal defence for various sorts of
Islamic derivatives based on futures markets for commodities. Much of
his argument depends on the institutional capacity of the market to
control the elements of gharar, or speculation, inherent in a
derivatives market. Professor Kamali displays a remarkably
sophisticated appreciation of modern finance that is not yet shared by
most ‘traditional’ legal scholars. As the bankers and economists
broaden the legal community’s understanding of finance, however,
interpretations along his lines crystallise day by day into a new
‘consensus’ concerning Islamic derivatives. Islamic finance has
acquired a considerable ‘flexibility’ from the initial steps taken by the
first Islamic Bankers. It has by no means finished, and will not be until
it becomes completely integrated into the kafir banking system.
While it is understandable that many Muslims find themselves in a

situation where they perceive that banking is necessary to their lives,
it is not justified to call it Islamic. If Muslims are forced by
circumstances to create a bank they should call it the “Haram Bank”.
The name will make people aware that all the transactions taking place
in the bank are forbidden and it will encourage people to eliminate our
dependency on the banking system.
The way of doing this is by establishing what is Halal. This starts with
the re-introduction of our Shari’ah currency, the Gold Dinar and Silver
Dirham, and the creation of payment systems which are not banking,
that is, they do not mix money with credit. After the Islamic payment
system is in place the next stage should be the creation of Islamic
markets, the re-introduction of the caravans, the guilds and the
Islamic courts of justice that can guarantee the true application of the
genuine Islamic contracts: Shirkat and Qirad.

5. Understanding Paper Money
The first aspect of arriving at a judgment is to understand the subject

matter, in this case what paper money is. After that we can look at
the Qur'an and the Fiqh.
Paper money has evolved in nature through history. What we know

today as paper money is not what it used to be. This evolution has
passed through basically three stages:
1] A promissory note backed by gold or silver.

2] A process of unilateral devaluation leading to a complete
revocation of the contractual agreement.
3] A piece of paper not backed by any specie, whose legal value is
determined by the compulsion of the State Law.
Let us examine these three stages one by one.
5.1 Paper money backed by gold and silver
First paper money was issued by banks and it represented a certain

amount of gold or silver, known as the specie. Even though it never
was 100% backed by the specie, the issuing bank was obliged to pay
the amount on demand. In this sense it represented a kind of debt.
When paper money was a debt, was it acceptable? What issues

concerning Islamic Law are relevant?
At this stage a certain amount of gold was held by typically a banking

institution and it issued a paper certificate giving the owner the right

to withdraw the specie on demand. (We will ignore the fact that this
was a banking institution and it would have been dealing with Riba.
We will pretend that they did not deal with interest in order to
concentrate on the issue of paper money itself.)
A) The first issue that arises is the one of amana (trust): Your gold is
in trust with a treasurer. What does Islamic Law have to say on this
issue? Allah ta’ala says in the Qur'an in Surat al 'Imran (3:74):
Among the People of the Book there are some who,

if you trust them with a pile of gold,
will return it to you.
But there are others among them who,
if you trust them with a single dinar,
will not return it to you,
unless you stay standing over them.
That is because they say,
"We are under no obligation
where the gentiles are concerned."
They tell a lie against Allah and they know it.
The hukm (legal judgment or command) of this ayat, according to

Qadi Abu Bakr ibn al-Arabi in his ‘Ahkamul Qur'an’, is as follows: “It is
forbidden for Muslims to have amana with the kuffar outside Dar al-
Islam,” that is, “without standing over them” under the power of a
Muslim authority. And the explanation for this is found in the ayat
itself: “That is because they say ‘we are under no obligation,’ that is to
say, because they can/will repudiate the agreement. Since this has
been proven to be historically the case, we may conclude that this is of
vital importance.
What this means is that it is not acceptable for Muslims to have money
deposited with kuffar anywhere since we do not have a Dar al-Islam in
which to exercise ‘standing over them’. A lighter interpretation would
suggest that it would be acceptable to have amana with a kafir if the

deposits are under the power of a Muslim authority. We accept the

latter version. But what it categorically denies is the possibility of
having amana with the kuffar when the wealth is stored under kafir
authority.
We can conclude that when paper currencies – dollars, pounds, francs,

etc. – were a debt, because the specie they represented was stored in
trust away from our control, they could not be accepted by us, since
we would fear that they would repudiate the agreement – as in fact
later happened.
B) Now, assuming that the amana is under a Muslim authority, the

second issue that arises is whether the promissory note can in itself be
treated as money. In other words, whether the note can be used as a
medium of exchange according to Islamic Law.
In this case the law of ‘transfer of debts’ becomes relevant. According

to the School of the Amal of Madinah we find the following judgment
and explanation in the Muwatta of Imam Malik:
Malik said, “One should not buy a debt owned by a man whether
present or absent, without the confirmation of the one who owes the
debt, nor should one buy a debt owed by a dead person even if one
knows what the deceased man has left. That is because to buy it is an
uncertain transaction and one does not know whether the transaction
will be completed or not.”
He also said, “The explanation of what is disapproved of in buying a

debt owed by someone absent or dead is that it is not known which
unknown debtors may have claims on the dead person. If the dead
person is liable for another debt, the price which the buyer gives on
strength of the debt may become worthless.”
Malik said, “There is another fault in that as well. He is buying

something which is not guaranteed for him, and so if the deal is not

completed, what he has paid becomes worthless. This is an uncertain

transaction and it is not good.”
The general idea is that in order to transfer a debt the original issuer
of the debt (the person who has the obligation) must guarantee the
value of the debt to the transferee (the person receiving the note).
Thus, the first contract is liquidated and a new private contract is
created. Debt is always kept as a private contract between the parties.
It does not circulate without the creation of a new private guarantee (a
new contract). The reason is that the person who has issued the debt
may have more obligations than he can fulfil.
How would this injunction have applied when paper money was issued
by the banks as a debt? Since every bank – and this is the whole idea
of credit money – issued more obligations than the amount that they
held in specie, it would not be acceptable to use any of its notes for
trading. The reason is, that the person would be accepting a debt that
is not guaranteed for him, especially when it is known that it cannot be
guaranteed for him since the issuer (the bank) has more obligations
than what it can fulfil. If every depositor in the bank were to demand
the value of their notes, as is the case in a ‘run on the bank’, the bank
would be unable to fulfil its obligations.
Conclusion. When money was a debt, in Islamic Law you would not
have been allowed to use it. You would not be allowed to use a dollar,
or a pound, or any note, whether it came from a kafir bank or a
Muslim-owned bank, whether the specie was stored in a kafir country
or in a Muslim country. Banking notes are not permitted to circulate.
But if the note is issued not by a bank, but instead by a person, and
that person is present and can privately guarantee the physical
possession of the goods, can in this case the note be transferred, sold
or circulate in general? What aspects of the Law are relevant to the
analysis of this case?

Again we have to go to the transfer of debts. What is relevant here is:

what is the specie that is held as guarantee for the obligation? In other
words, what is the specie of the note? If the obligation is in gold
(money) then another set of restrictions come into place. If it is food
then, again, another set of restrictions come into place. This is
because gold, silver and food have a particular significance to trading
– they are commonly used as a medium of exchange. The case is the
following:
In the chapter called Money-Changing of the Muwatta of Imam Malik

we read:
“Yahya related to me from Malik from Ibn Shihab from Malik ibn Aws
ibn al-Hadathan an-Nasri that he once asked to exchange 100 dinars.
He said, ‘Talha ibn ‘Ubaydullah called me over and we made a mutual
agreement that he would make the exchange with me. He took the
gold and turned it about in his hand and then said, “I cannot do it until
my treasurer brings the money to me from al-Ghaba.” ‘Umar ibn al-
Khattab was listening and ‘Umar said, “By Allah! Do not leave him until
you have taken it from him!” Then he said, “The Messenger of Allah,
may Allah bless him and grant him peace, said, ‘Gold for silver is usury
except hand to hand. Wheat for wheat is usury except hand to hand.
Dates for dates is usury except hand to hand. Barley for barley is
usury except hand to hand.’””
The first restriction is that you cannot use the gold or food in an
exchange (sarf) unless the specie is physically present there. You
cannot use the claim of gold or food stored with a treasurer. The items
exchanged have to be present.
This matter rules out any possibility of using paper notes representing
gold or silver to buy physical gold or silver. In addition, the exchange
of paper notes with other paper notes is prohibited because it is Debt-
for-Debt.

This prohibition of using promissory notes in an exchange is further

reinforced by the following words:
Yahya related to me from Malik that he had heard that al-Qasim ibn
Muhammad said, “‘Umar ibn al-Khattab said, ‘A dinar for a dinar, and a
dirham for a dirham, and a sa' for a sa'. Something to be collected
later is not to be sold for something at hand.’”
Yahya related to me from Malik that Abu'z-Zinad heard Sa'id al

Musayyab say, “There is usury only in gold or silver or what is weighed
and measured of what is eaten and drunk.”
All this clearly indicates that not only gold and silver but also any food
that could be used as payment is included in the prohibition, that is to
say, the prohibition extends to any form of ‘common money’. Any note
that represents any form of ‘common money’ cannot be used in an
exchange. With that restriction in mind, it means that a banking note
cannot really be used as money, but only as a private contract – which
is the basis of our argument.
But what about a note held by a Muslim treasurer and guaranteed: can
it be used in a transaction other than an exchange? Can it be used, for
example, to buy other goods in the market?
“Yahya related to me from Malik that he had heard that receipts

(sukukun) were given to people in the time of Marwan ibn al-Hakam
for the produce of the market of al-Jar. People bought and sold the
receipts among themselves before they took delivery of the goods.
Zayd ibn Thabit and one of the Companions of the Messenger of Allah,
may Allah bless him and grant him peace, went to Marwan ibn Hakam
and said, “Marwan! Do you make usury halal?” He said, “I seek refuge
with Allah! What is that?” He said, “These receipts which people buy
and sell before they take delivery of the goods.” Marwan therefore
sent guards to follow them and take them from people’s hands and
return them to their owners.”

This means that you cannot use a promissory note and use it for
trading as if it were money. The correct purpose of the promissory
note is not to be money, but to be a private contract that must remain
private and not public.
So, what is the use of the promissory note? What is the halal usage of
it? It is halal to have a contract or a debt, and it is also halal to
transfer that debt, provided that the person who issued it is accessible
and can guarantee the payment of the debt by signing a new contract
(promissory note) with the new recipient. If the guarantor is not a
Muslim, then in addition to what we have said, he also has to have his
amana within Muslim territory and under the overall supervision of an
enforcing Muslim authority.
5.2 Devaluation in paper money
The second stage refers to the process of those years in which paper
money was constantly devalued from its initial obligation (they paid
less than they had promised), up until the debt was finally completely
revoked (they withdrew their obligation). This final elimination of the
obligation took place with the dollar in 1973, when Nixon unilaterally
revoked the obligation of paying one ounce of gold for every 35 dollars.
What is the Islamic position regarding a promissory note when one of

the parties unilaterally revokes its obligation, whether it is complete or
partial? That is to say, what is the Islamic ruling when a debt is
unilaterally revoked or devalued?
It is not acceptable. It is a violation of the contract. If this is done with

premeditation and no responsibility is accepted, it amounts to pure
theft. Theft is punishable in Islam.

To use the note to transfer it to other people, falls under all the
restrictions that we have expressed before, with an added element.
You are dealing with the promissory note of a known thief who does
not admit his guilt or past obligations.
5.3 Paper money with no backing, but only State

legal compulsion
Finally we arrive at the money which we have today. There is no

promise of payment in specie of any kind. It only has a legal value
based on the obligation of the citizens of the country to accept the
national currency as a means to redeem debts. This is the ‘Law of
Legal Tender’. It gives the State the unique ability to confiscate
anyone’s wealth within the nation and to pay for it in compensation
with its own legal note.
Is this an acceptable means of payment in Islam?

Imam Malik said money is “any merchandise commonly accepted as a
medium of exchange.” This implies two things:
A) Money has to be a merchandise. Therefore it could be paper. But

paper only for the value of the paper itself, not for what is written on it.
Money must be something tangible (‘ayn). Money cannot be a liability
of any kind.
B) Money must be commonly accepted. Therefore it cannot be
imposed. No-one can say it is obligatory on you. No-one can even
make the Gold Dinar obligatory on the people. The Gold Dinar and the
Silver Dirham become a currency out of free choice, not as the result
of decree. Paper money is imposed on people. This obligation is not
accepted in Islam for two further reasons:
– The fraudulent nature of the offer: they oblige you to accept
something above its value (its real value is zero).

– The obligation of the offer: you are obliged to accept it whether you
like it or not.
This unlawful behaviour is further reinforced by the application of State

laws that restrict the use of any other merchandise as a means of
payment, thus enforcing the State monopoly on the currency,
particularly in regard to gold and silver. Gold and silver are either
taxed, or their use is regulated and sometimes disallowed. In some
extreme cases we have seen gold confiscated by law from the private
citizens, as has been case in the USA.
Paper money is not valid money in Islamic Law, whether in its present
form or in any of the forms in which it has existed in the past. The
Shari‘ah money is the Gold Dinar and the Silver Dirham. Any
merchandise commonly accepted as a medium of exchange is also
accepted as a valid money in Islam.

6. The Islamic Mu’amalat
Islam has its own economic model. This model is not capitalist, nor is
it socialist. It stems from the Qur’an and the Sunna. It has a history of
1400 years, from the beginning of Islam up until the dissolution of the
Khalifate in the 20th century. This model protects and acknowledges
private property as well as property of Allah (awqaf) and it is based on
Islamic contractual law.
The Islamic model uses physical commodities as money. The Gold

Dinar and the Silver Dirham are known as the Shari’ah currency.
These two commodities (gold and silver) have a special status because
they are mentioned in Qur’an and they are the measure for
fundamental matters such as Zakat and issues concerning hudud. The
Dinar and the Dirham are fundamental in preserving a stable currency,
that is, a currency that fluctuates in value but does not suffer inflation.
It does not suffer inflation because it cannot be substituted by credit
money (inflated), since credit money has no validity in Islamic Law.
The minting of the Dinar and the Dirham is already a reality. Muslims
across the world are starting to use them as a means of payment and
to pay Zakat. A payment system based on the Dinar and the Dirham
that facilitates payment across the world strictly following Islamic Law
was established in 1999. It is called e-dinar. It is a practical alternative
to banking transfers and allows individuals to avoid the use of credit
money if they wish to. The legal implication of the development of
these tools is that the case of darurah is no longer justified. There is
an alternative way. It further demonstrates that there is no need to
remain inside a system which is not acceptable, and that to establish
the Halal is certainly possible.

The Islamic currency is one of the key elements in the reconstruction

of the Islamic Mu’amalat: a complete system of trading in which
Islamic Law is applicable without any distortion or omission. Such a
system is a condition in order to live an Islamic life. It is an imperative
to reconstruct it in our present age. The reconstruction of the
Mu’amalat consists of the restoration of crucial infrastructures of
trading, such as the open markets, the currency, the caravans, the
guilds and the hisba. These institutions have long disappeared and are
necessary to the understanding and implementation of the Islamic
business contracts, Qirad and Shirkat. Without them many of the
practices of the early community appear to be impossible or
impractical. Thus, the restoration of the Mu’amalat must be
simultaneous to the implementation of the Islamic contracts. They
both need each other.
To solve a situation of darurah requires a transformation of the

conditions in which we trade, which means to restore our practices.
Our argument is that since we are already in the banking system and
we use it, we should use what comes out of the interest of the banks
to promote and encourage the restoration of the Halal alternative. We
argue that the best use of the interest received from of the banks is to
establish an Islamic infrastructure that will free us of our dependence
on the banks.
The restoration of the Mu’amalat is not an issue for a single individual;

it is an issue for a community. Muslims have to organise themselves
around community leaders and in their absence they must create their
own. At an international level, the creation of the World Islamic Trade
Organisation in 1993 had created a platform to establish those
necessary institutions of trading. The WITO created the Islamic Mint,
which minted the first Dinars and Dirhams. These are now available all
over the world and are minted in five countries. WITO encouraged the
creation of e-Dinar which is available online (www.e-dinar.com). This
website allows individuals to open accounts in Gold Dinars and make
payments with the same facilities of other banking online companies,

but without being a bank. The e-dinar payment system offers an

instant solution for those who want to move away from the banking
system.
6.1 The Islamic business contracts
The regulation of the contracts plays a fundamental part of the social

aspects of Islamic Law. In Islamic Law all the attention is on how the
exchange of goods takes place, because it is understood that if the
exchange of goods is correct, the whole edifice of trading will be
correct, but if the exchange of goods is incorrect it does not matter
how much we try to remedy the situation, the whole edifice of trading
will remain incorrect. In Islamic Law the act of exchange of goods
represents the minimal unit of trading. Thus all the regulations are
guided to keep justice in every commercial and business exchange.
How to make a contract and the limitations of the different kinds of

contracts is therefore very important in Islamic Law. The contract is
only necessary when delayed terms are stipulated between the parties,
such as a sale with delayed payment, or a rental. Also all the business
transactions, such as partnerships – because they involve delayed
terms – have to be written according to Islamic Law. The business
contracts or those contracts where the stipulation of a business or
profit is involved are two: Shirkat and Qirad. All the rest are
commercial contracts. Non-commercial contracts are for example the
gracious loan (ariya) or the contract of deposit (amana).
All business contracts need to be written in a form of a contract

specifying the negotiable conditions. The Shirkat is an Islamic
partnership, and the Qirad, also called Mudharaba, is an Islamic
business loan. The Shirkat and the Qirad have certain predetermined
conditions that cannot be altered; other conditions need to be
negotiated by the parties.

The importance of the correctness of the business and commercial

contracts is such that the use of particular types of contracts will affect
how society develops. A society where unjust contracts are allowed –
i.e. Riba – will produce a kind of society different from the one in
which they are not allowed. This is the reason why contractual law is
so important in the body of Islamic Fiqh. Almost two thirds of all
Islamic Fiqh concerns trade and business.
Islamic Law, derived from the Qur’an and the Sunna of Rasulullah,
sallallahu alayhi wa sallam, defines the parameters in which contracts
of commercial transactions and business should take place.
Commercial transactions are based on the exchange of the

ownership of goods. If the exchange involves delayed payment, then a
contract must be written. But it is not necessary if the transaction
takes place ‘hand to hand’.
A commercial or business transaction is correct according to Islamic

Law if it has equity: the value of the goods given must be equal to the
countervalue of the goods received. If these values are not equal, the
exchange becomes usurious.
A business consists of two or more commercial transactions

connected for the purpose of obtaining a profit. When two or more
persons associate themselves to execute a business then a contract is
required between the parties involved.
A primary form of defining the equity of a business according to

Islamic Law is that all the transactions that it involves are equitable. In
addition, when a business contract is written, there are certain
conditions that must be taken into account. We are going to examine
the most important of these conditions.
The goods that make up the initial investment either belong to one
person (no contract is necessary) or they belong to more than one
person (a contract must be written). It may also be that the goods

belong to one person but that they come from a business loan – then a
contract must also be written.
Therefore there are two possible basic forms of business contract:
a] the investors (everyone) transfer the ownership of the investment

to themselves, all of them as a group; or
b] the investor/s (everyone) transfer the ownership of the investment

to another party.
The first type of business contract is called in Arabic ‘Shirkat’ – we will also
call it a partnership – and the second type of business contract is called in
Arabic ‘Qirad’ – we will also call it a business loan.
6.1.1 Shirkat (Partnership)
Partnership is in its general meaning any association of persons who

share the ownership of some goods. Therefore partnership requires co-
ownership of some goods. And if these goods are invested in a
business then we have the necessity of a business contract.
Co-ownership is called in Arabic ‘Shirkat Milk’. A business partnership

is called in Arabic ‘Shirkat Akid’.
“Shirkat, in its primitive sense, signifies the conjunction of two or

more estates, in such a manner that one of them is not
distinguishable from the other. In the language of the Law, it
signifies the union of two or more persons in one concern. The
term ‘shirkat’, however, is extended to the contracts, although
there is no actual conjunction of states, because a contract is the
cause of such conjunction.”
(The Hedaya1 , translation by Hamilton, pp 217-31)
1Quotations from The Hedaya by Burhanuddin Abu Bakr Al-Marginani, written in the eighth
century, translated by Charles Hamilton under the patronage of Warren Hastings, Governor of
Bengal and published in 1870 in London.

Shirkat is lawful. In the time of the Prophet, sallallahu alayhi wa sallam,

men were accustomed to practicing partnership. In his Muwatta, Malik
said:
“The way of doing things among us is that there is no harm in

partnership (ash-shirka), transferring responsibility to a deputy
(at-tawliyah) and revocation (al-iqalah) when dealing with food
and other things, whether or not possession was taken, when the
transaction is with cash, and there is no profit, loss or deferment
of its price. If profit, loss or deferment or the price form one of
the two enters any of these transactions, it becomes a sale which
is made Halal, and made Haram by what make sale Haram, and
it is not partnership, transference of responsibility to a deputy, or
revocation.”
Shirkat is of two kinds depending on how it originates:
Shirkat Milk, or partnership by the right of property, and

Shirkat Akid, or partnership by a business contract.
The one that we are interested in exploring is the business contract of
Shirkat, which is commonly called Shirkat Akid or business partnership
The most significant conditions are:
• The Principle of Takafu’ (Proportionality)
The share of a partnership where all the partners work and put in
capital depends on the different amounts of capital invested. If there
are differences in capital among the partners but they all work the
same amount, then the lesser investor can be compensated for his
extra work.
“I have heard from Malik that partnership is not permissible unless
there exists a balance (takafu‘) in the capitals.”2
2Sahnun, Mudawwana, 12: 41.

• The Necessity to Participate in the Work
A partnership assumes the participation of all its members in the

actual work. An association in which all the work is assigned to one
partner, while the other provides some necessary capital or equipment,
but no work, is not a valid partnership. The non-working party is not
entitled to any share of the income and can claim only the return of his
investment and, if it happened to be in a form other than cash, some
equitable rental fee for its use.
Surplus capital cannot be used as investment in a partnership without

physically participating in the work of the business. So you cannot
have a capitalist investing in the production made by other people. The
only formula for a silent investor is a business loan or Qirad. In a
partnership all the partners have to work, they are all equally owners
and therefore equally responsible.
I said: “What is your opinion of an arrangement in which I place

a person in a stall and say to him: ‘I will accept the goods and
you will do the work on the condition that what ever God grants
us will be shared between us equally?’” He said: ”According to
Malik, this is not permissible.”3
I said: “What is your opinion of a partnership between three

people in which one provides the millstone, the other the house,
and the other the work-animal, on the condition that the owner
of the animal does all the work?” He said: “The entire proceeds
of the work are to go to the owner of the animal who executes
the work, and he is obligated to pay the rental fee for the
millstones and house.” I said: “Is this also the case even if he
does not earn anything?” He said “Yes, even if he does not earn
anything.”4


Ibn Qasim rejects the validity of a partnership based in cash only

which stipulates that all the work be done by only one of the
partners. He explains his rejection as follows:
“The basis for this is that according to Malik, a partnership is not

permissible unless they combine in its work proportionally to
their respective shares in the joint capital.”5
The results are manifold: The first one is quite obvious which is that
there cannot be capitalist investors using their capital to benefit from
the manufacturing work of other people without occupying themselves
in the work. The second one is the fact that all the owners in a co-
ownership can exercise their ownership with identical status
independent of the share that they may have in the business. Both
principles show the fallacy of the Stock Exchange.
The establishment of a Stock Exchange is a result of the previous

creation of a false concept of ownership. This false concept of
ownership is based on what they call “majority ownership”. On this
basis you can be the owner of a company by contract despite not
having any executive decision over your property. Ownership is
declared in a piece of paper, but the same piece of paper guarantees
that you cannot decide – therefore you cannot own the property. This
is the falsehood of this kind of contract. The contract of shareholding
with majority ownership is according to Islamic Law not acceptable
and is considered to be a form of cheating.
The Essence of Ownership
Ownership is not just a document that says you are the owner of
something. Ownership means you are entitled to and also capable of
deciding how to dispose of your property. Otherwise you are not the
owner. Decision over a property is the essence of ownership.

Ownership exists every time something is used or consumed, although

ownership is legally regulated only when scarcity appears. There were
no regulations for fishing in the sea, but as the fleets increased and
the fish became scarce, the regulation of ownership became necessary.
Everybody disposes freely of air to breath, but the use of the flight
paths of planes became regulated. Before regulation there was also
ownership, because when a plane used a flight path nobody else could
use it. That was effectively ownership.
Therefore, explicitly regulated or not, ownership has an existential

reality connected to the use of something. Ownership consists of the
capacity to use something. To hold the capacity to decide is effectively
ownership. Modern commercial legislation allows for a type of
ownership disconnected from the capacity to decide. This leads to the
idea of an ownership exclusively defined by the title but without
decision-making powers. This is not possible in Islam since the title
and decision-making powers are bound together.
When ownership is exercised individually, there is no difficulty in

understanding how the decision is made. But what happens when
there is collective ownership? If they are all owners they must all own.
Therefore, in Islamic law, the co-owners submit to these two principles.
1. All the co-owners have the same status of decision, regardless
of their participation in the property.
2. The results of the business are shared among the co-owners in
proportion to their participation in the business as established in the
contract.
If the first condition is not fulfilled, then the co-owners are no longer
owners, and someone is usurping the shared ownership. Islamic law
demands that every time there is a commercial agreement between
two or more parties, a contract must be written. This contract is what
constitutes the private decision of the business. The business contract
clearly defines in advance the nature of the business: who are the

investors, who is the agent (if there is one), the quantity of the
investment, the objective of the business, its duration, and the sharing
of its results. Therefore, when you sign the contract, you know what
you are participating in. When you invest, you know what you are
investing in. Now, what you have in modern investment is an
agreement which is not considered a contract within Islamic law.
Rather, the investor lends the money to an unknown owner, to an
unknown business, with no fixed duration, whose profits or dividends
are decided by that unknown owner. This is all done under the
falsehood of majority ownership.
The false concept of majority ownership
This false concept was brought about for the purpose of the creation of
a mechanism of control and manipulation which ended up being the
establishment of the Stock Exchange. It is based on the principle that
whoever has a simple majority of the shares of a company owns the
company. This system allows the control of great portions of the
market by very few people. For example: Mr Stone who owns 51% of
company A has control of the company. If he uses the capital of
company A to buy 51% of company B, he will have total control of
company B although he owns only approximately 1/4 of its capital. If
he then uses the capital of company B to buy 51% of company C, he
will have total control of C, although he owns only 1/8 of the capital.
Mr Stone can then buy a company D, E, F ... in the same way.
The false concept of majority ownership has enabled the usurping of

the legal ownership of millions of minority co-owners. Through this
procedure, Mr Stone has power over an enormous amount of capital
that is not his. He can decide what the results, now called dividends,
are. But dividends are not the same as the results of the business. The
company must be liquidated in order to know the results of the
business. The system of majority ownership makes these companies
exist without results, without liquidation. Because the majority owner
can decide how much is going to be re-invested and how much will be
paid out as dividends, you are tied to the company against your will.

In Islamic Law, you cannot force any investor to re-invest without his
approval. The results, therefore, must be completely shared, by the
liquidation of a company after the period stipulated in the contract as
the duration of the company. If they all agree to continue they can
continue, if not, the company is liquidated to start again with a new
contract. Thus ownership is always protected. The majority ownership
system only protects the company ownership of the majority owners,
but does not protect the ownership of the rest of the co-owners.
6.1.2 Qirad (business loan)
Qirad is usually referred to with three different words:
Mudharaba (originated in Iraq); this is what the people of Iraq called

Qirad; according to al-Sarakhsi, this word is derived from the
expression ‘al-darb fi al-ard’ which means ‘making a journey’. This
term is used because the agent-manager has the right to claim the
profit by virtue of his effort and work. Indeed he is regarded as the
investor’s associate in matters relating to the profit and capital used
on the journey and for arrangements or ancillary expenses. The
investor is entitled to receive a share of the profit on account of
investing with his capital.
Qirad or Muqaradah (originated in Madinah); this is what it was called

in Madinah. The word comes from the Arabic ‘qard’, which means the
surrender of rights over capital by the owner to the user of the capital
[a loan]. Agent is in Arabic ‘al-‘amil’ and the investor in Arabic is
‘sahibul-mal’ or ‘rabbul-mal’-
Commenda (originated in Medieval Europe), from the contract of

accomendacio of the jus commune. The investor was called
commendator and the agent was called tractator. This contract was
introduced into Europe, especially Southern Europe through the Italian
seaports of the late tenth and early eleventh centuries of the christian
calendar.

Ibn Rushd said;
“There is a consensus of opinion among the Muslims with regard

to the legality of Qirad. It was in vogue in the pre-Islamic period
and Islam adopted it. There is a consensus of opinion that it
consists in giving some capital by one person to another for
business. The user of capital receives an agreed proportion of the
profit, i.e. any proportion they may agree, one-third, one-forth,
or even one-half.”
(Ibn Rushd, Bidayat Mujtahid wa Nihayatul-Muqtasid, Cairo, 1329,
p. 205)
The Prophet, sallallahu alayhi wa sallam, worked as an agent for

Khadijah before he married her.
All the Muslim jurists agree on its legitimacy as a form of business

transaction and they formed this opinion on the basis of its wide
practice by the Companions of the Prophet, sallallahu alayhi wa sallam,
during his lifetime and after. The Prophet, sallallahu alayhi wa sallam,
knew it and approved of it.
The main conditions of Qirad are:
1. The agent of Qirad who is asked to buy credit or make an

exchange and then use the funds, has the right to charge for
that work with a salary, without losing his rights of a part of the
profit of the loan.
2. The agent can not be obliged to do a manufacturing work, such

as sewing or embroidering. Qirad is not for manufacturing, it is
only for trading.
3. Every mutually consented loan, even in the form of Qirad, in

which funds are destined to pay for a merchandise that the
lender knows have been already bought, is not a Qirad. It is a
ordinary gracious loan.

4. The agent is free to buy and sell whatever he wants, and in the
place and in the time that he wants.
5. Qirad is not for time. It is not permitted for the agent to

stipulate that he use the Qirad for a certain number of years
and that it not be taken back from him during that time.
6. Guarantees in Qirad are void. The stipulation of guarantee in

Qirad is null and void. The investor is not permitted to stipulate
conditions about his principal other than the conditions on which
Qirad is based.

7. Conclusion: What to do?
From an Islamic perspective, what can a person do with the interest he

has earned on his deposit? The problem is not just the interest, the
problem is to have the bank account in the first place. The solution is
not therefore to abandon the interest to the bank, that does not solve
the problem. The solution must come from changing the circumstances
in which we find ourselves forced to use the Haram: darurah.
We are against the idea of perpetuating the status of darurah as is

done by Islamic Banks. Our position is that we Muslims must take an
active role in changing the situation we find ourselves in. Therefore,
our proposal is to use the money of the interest in order to promote
the Halal alternative.
The first step should be to allocate those funds emerging from the
interest into special Dinar accounts and to place them under an
organisation that will undertake the restoration of the infrastructure of
our Islamic Mu’amalat. Those funds will allow us to establish the
Islamic currency and to gradually enable us to abandon the banking
system. At the same time it will allow us to build trading
infrastructures such as markets that will allow us to further disengage
from other capitalist institutions.
Overall the idea is that we as Muslims have a duty to change the

situation. We all know that what we are doing is Haram. We cannot
simply remain for ever under the auspices of darurah, because darurah
is only a temporary measure. Our objective must be to use all our
resources to eliminate our dependency on the banking system one
step at a time.
However difficult the prospect of abandoning banking might look, we

must remember that we do this fisabilillah. Allah has declared war on

Riba, our obligation is to abandon it, since it is indeed more difficult to

remain in it than to get out of it.
7.1 Practical Steps
The aim of any attempt to establish the Gold Dinar as a currency must
be, from an Islamic perspective, the establishment of Zakat. Zakat is
one of the main pillars of Islam which at present has been corrupted
by the introduction of alien means belonging to the Riba economy.
First step: Contact a responsible company that can help you to

purchase physical Dinars and Dirhams. If you do not have access to
Dinars and Dirhams, buy any form of gold or silver coins. You can also
buy gold or silver bullion. You can take delivery of the bullion or you
can deposit it with a reputable company in an allocated or non-
allocated deposit.
Second step: Open a Dinar account in e-dinar (www.e-dinar.com).

Alternatively you can open a bullion account in a non-banking
repository which offers payment facilities such as e-gold or e-bullion.
This type of gold account will allow you to operate with an
internationally accepted currency such as gold and save your money
from inflation.
Third step: Invite your suppliers and your customers to open similar
Dinar and Dirham accounts (or gold and silver accounts) and offer
them to pay and be paid using gold and silver. The price of gold and
silver is daily determined and is easily accessible through newspapers
or through the Web. E-dinar offers daily exchange rates for the Dinar
and Dirham in all major currencies.
Fourth step: Establish a network of shops and users of the Dinar and
Dirham in your community and publish a newsletter listing all
participants, regularly upgrading it with new members who accept

Dinar and Dirham. Zakat should then be collected and distributed

using Dinar and Dirham.
Fifth step: Establish an Islamic Qirad Fund and invite users to invest
in the Fund. The fund will be dedicated to financing trading activities
only according to the rules of Qirad. The benefits will be shared among
the investors according to the stipulated conditions of the contract.
Finally, we need to affirm that the interest should not be given to the
bank under any circumstances. Abandoning the interest does not make
the transaction Halal and does not help us to change the situation.
May Allah gives us the strength and the wisdom to abandon Riba and
to establish His Deen in our times. Amin.

Fatwa On Banking

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FATWA

BY UMAR IBRAHIM VADILLO

Umar Ibrahim Vadillo 2

Allah obliterates riba but He makes sadaqa grow in value!

O you who believe! Show fear of Allah

O you who believe! Do not feed on riba,

Umar Ibrahim Vadillo 3

Because of wrongdoing on the part of the Jews,

Rasulullah, sallallahu alayhi wa sallam, said the following concerning

Abu Huraira said that the Messenger of Allah, sallallahu alayhi wa

Abdallah ibn Hanzala reported that the Messenger of Allah, sallallahu

Abu Huraira reported the Messenger of Allah, sallallahu alayhi wa

Umar Ibrahim Vadillo 4

Samura bin Jundab reported that the Messenger of Allah, sallallahu

The Messenger of Allah, sallallahu alayhi wa sallam, cursed the one

There are of course alternatives to Riba. As Rumi once explained,

The answer to this problem is not to alter the contracts but to

Umar Ibrahim Vadillo 5

Umar Ibrahim Vadillo 6

Many Muslims have interest-bearing accounts. Interest is without any

Most people decide between the following options:

1] Keep the interest as part of the darurah situation

Umar Ibrahim Vadillo 7

When a darurah status is claimed, the imperative action is to

Darurah relates to our economic environment. Therefore to understand

The key to understanding our present economic situation is the

Umar Ibrahim Vadillo 8

forbidden practices. We will look at this matter in the section called

Another important matter is to clearly state that Islamic Banking is

Ultimately we must understand the importance of what is Halal, what

Umar Ibrahim Vadillo 9

3.1 A world shaped by Riba

It is generally assumed that from the point of view of material wealth,

During this period of a massive shift of wealth to a small corner of the

Umar Ibrahim Vadillo 10

inevitable, which in turn results in the increased anger and frustration

This present system of economic disequilibrium is self-preserved by

At its core, this system of disequilibrium which we call capitalism is

A society which misunderstands the dynamics of the world will find it

3.2 What is Riba?

Understanding Riba is essential to understanding capitalism and thus

Umar Ibrahim Vadillo 11

Riba represents the opposite of trading, it is the corruption of trading.

Umar Ibrahim Vadillo 12

1] An extra benefit arising from unjustified increase in the weight or

That is to say, there are two types of Riba:

Riba al-fadl refers to quantities. Riba an-nasiah refers to time delay.

Riba al-fadl is very easy to understand. In a loan, Riba al-fadl is the

Understanding Riba an-nasiah is more subtle. It is an excess in time

Umar Ibrahim Vadillo 13

payment is delayed. To exchange (safr) dayn for ‘ayn of the same

This is supported by many hadith on the issue. Imam Malik related:

“Yahya related to me from Malik that Abu'z-Zinad heard Sa'id al

The Hanafi scholar Abu Bakr al-Kasani (d. 587H) wrote:

“As for Riba al-nasa’ it is the difference (excess) between the

Riba an-nasiah refers particularly to the use of dayn in the exchange

Umar Ibrahim Vadillo 14

“Yahya related to me from Malik that he had heard that receipts

Umar Ibrahim Vadillo 15