The Islamic Financial System

While elimination of "Riba" or interest in all its forms is an important feature of the
Islamic financial system, Islamic banking is much more. At the heart of Islam is a sense
of cooperation, to help one another according to principles of goodness and piety (but not
to cooperate in evil or malice). In essence, it aims to eliminate exploitation and to
establish a just society by the application of the Shari'ah or Islamic law to the operations
of banks and other financial institutions. To ensure compliance to the Shari'ah, Islamic
banks use the services of religious boards comprised of Shari'ah scholars.
Islamic finance may be viewed as a form of ethical investing, or ethical lending, except
that no loans are possible unless they are interest-free. Among the ethical restrictions is
the prohibition on alcohol and gambling and the consumption of pork. Islamic funds
would never knowingly invest in companies involved in gambling, alcoholic beverages,
or porcine food products
Its practitioners and clients need not be Muslim, but they must accept the ethical
restrictions underscored by Islamic values.

What is Islamic Banking?

Islamic banking has the same purpose as conventional banking except that it operates in
accordance with the rules of Shari’ah, known as Fiqh al-Muamalat (Islamic rules on
transactions). Islamic banking activities must be practiced consistent with the Shari’ah
and its practical application through the development of Islamic economics. Many of
these principles upon which Islamic banking is based are commonly accepted all over the
world, for centuries rather than decades. These principles are not new but arguably, their
original state has been altered over the centuries.
The principle source of the Shari’ah is The Qur’an followed by the recorded sayings and
actions of Prophet Muhammad (pbuh) – the Hadith. Where solutions to problems cannot
be found in these two sources, rulings are made based on the consensus of a community
leaned scholars, independent reasoning of an Islamic scholar and custom, so long as such
rulings to not deviate from the fundamental teachings in The Qur’an.
It is evident that Islamic finance was practiced predominantly in the Muslim world
throughout the Middle Ages, fostering trade and business activities. In Spain and the
Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for
trading activities. It is claimed that many concepts, techniques, and instruments of
Islamic finance were later adopted by European financiers and businessmen.
The revival of Islamic banking coincided with the world-wide celebration of the advent
of the 15th Century of Islamic calendar (Hijra) in 1976. At the same time financial
resources of Muslims particularly those of the oil producing countries, received a boost
due to rationalisation of the oil prices, which had hitherto been under the control of
foreign oil Corporations. These events led Muslims' to strive to model their lives in
accordance with the ethics and principles of Islam.
Disenchantment with the value neutral capitalist and socialist financial systems led not
only Muslims but also others to look for ethical values in their financial dealings and in
the West some financial organisations have opted for ethical operations.
Islamic Banking Principles
The Shari’ah prohibits the payment of charges for the renting of money (riba, which in
the definition of Islamic scholars covers any excess in financial dealings, usury or
interest) for specific terms, as well as investing in businesses that provide goods or
services considered contrary to its principles (Haram, forbidden). While these principles
were used as the basis for a flourishing economy in earlier times, it is only in the late 20th
century that a number of Islamic banks were formed to apply these principles to private
or semi-private commercial institutions within the Muslim community.
"While a basic tenant of Islamic banking - the outlawing of riba, a term that encompasses
not only the concept of usury, but also that of interest - has seldom been recognised as
applicable beyond the Islamic world, many of its guiding principles have. The majority of
these principles are based on simple morality and common sense, which form the bases
of many religions, including Islam.
"The universal nature of these principles is immediately apparent even at a cursory glance
of non-Muslim literature. Usury was prohibited in both the Old and New Testaments of
the Bible, while Shakespeare and many other writers, particularly those writing in the
19th century, have attacked the barbarity of the practice. Much of the morality
championed by Victorian writers such as Dickens - ranging from the equitable
distribution of wealth through to man's fundamental right to work - is clearly present in
modern Islamic society.
"Although the western media frequently suggest that Islamic banking in its present form
is a recent phenomenon, in fact, the basic practices and principles date back to the early
part of the seventh century." (Islamic Finance: A Euromoney Publication, 1997)

Rules of Permissibility
Muslims believe that all things have been provided by God, and the benefits derived from
them, are essentially for man’s use, and so are permissible except what is expressly
prohibited in The Qur’an or Hadith. When guidance is not clearly given in he Qur’an
there are several other sources of law. For example, guidance can be sought from Fiqh,
which means ‘understanding’ and is the science of jurisprudence: the science of human
intelligence, debate and discussion

Prohitbition of Interest
Riba best translated today as the charging of any interest, meaning money earned on the
lending out of money itself. The prohibition on paying or receiving fixed interest is based
on the Islamic tenet that money is only a medium of exchange, a way of defining the
value of a thing; it has no value in itself, and therefore should not be allowed to give rise
to more money, via fixed interest payments, simply by being put in a bank or lent to
someone else. The human effort, initiative, and risk involved in a productive venture are
more important than the money used to finance it.
Money in Islam is not regarded as an asset from which it is ethically permissible to earn a
direct return. Money tends to be viewed purely as a medium of exchange. Interest can
leads to injustice and exploitation in society; The Qur’an (2:279) characterises it as
unfair, as implied by the word zulm (oppression, exploitation, opposite of adl i.e. justice)

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There is no real 'lending' in Islam since all 'lenders' obtain ownership interests in the
assets that they finance, or earn a profit-share or purely fee-based remuneration. In order
for an Islamic bank to earn a return on money lent, it is necessary to obtain an equity, or
ownership, interest in a non-monetary asset. This requires the lender to also participate in
the sharing of risk.
Individuals and the world as a whole probably know too well the burden of interest and
misery and suffering that irresponsible lenders have inflicted on individuals and societies.
It has become so completely institutionalised and accepted in modern economies that it is
almost impossible to conceive that there are some who completely oppose it and refuse to
enter into any transactions that involve interest.
Islam's prohibition of interest and usury was not unprecedented. The early Jewish and
Christian traditions also forbade riba. Even the renowned Greek philosopher, Aristotle,
condemned acquiring of wealth by the practice of charging interest on money.
“Very much disliked also is the practice of charging interest: and the dislike is fully
justified for interest is a yield arising out of money itself, not a product of that for which
money was provided. Money was intended to be a means of exchange; interest represents
an increase in the money itself. Hence of all ways of getting wealth, this is the most
contrary to nature." Aristotle, The Politics, tr. Sinclair, pg. 46, Penguin
“Do not charge your brother interest, whether on money or food or anything else that may
earn interest.” (Deuteronomy 23:19)
“If you lend money to My people, to the poor among you, you are not to act as a creditor
to him; you shall not charge him interest.” The Holy Bible (American Standard Bible)
[Jesus said], “If you have money, do not lend it at interest, but give [it] to one from whom
you will not get it back.” Gospel St Thomas, V95

Other Key Prohibitions

Islam not only prohibits dealing in interest and investment in unlawful activities that
Islam deems harmful to society, but also transactions involving excessive uncertainty
(gharar) and all forms of gambling (maysir).

Islamic Economics Order

Islamic banking is an instrument for the development of an Islamic economic order.
Some of the salient features of this order may be summed up as:
1. While permitting the individual the right to seek economic well-being, Islam
makes a clear distinction between what is halal (lawful) and what is haram
(forbidden or unlawful) in pursuit of such economic activity. In broad terms,
Islam forbids all forms of economic activity, which are morally or socially
injurious.
2. While acknowledging the individual's right to ownership of wealth legitimately
acquired, Islam makes it obligatory on the individual to spend his wealth
judiciously and not to hoard it, keep it idle or to squander it.
3. While allowing an individual to retain any surplus wealth, Islam seeks to reduce
the margin of the surplus for the well-being of the community as a whole, in
particular the destitute and deprived sections of society by participation in the
process of Zakat (a tax on wealth that is distributed to the needy).
4. While making allowance for the ways of human nature and yet not yielding to the

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 consequences of its worst propensities, Islam seeks to prevent the accumulation of
wealth in a few hands to the detriment of society as a whole, by its laws of
inheritance.
5. Viewed as a whole, the economic system envisaged by Islam aims at social justice
without inhibiting individual enterprise beyond the point where it becomes not
only collectively injurious but also individually self-destructive.

]Wealth and Islam

Islam has a unique dispensation on the theme of wealth, its ownership, distribution and
social relationship. Islam enjoins wealth creation not for its own sake.
The theme of Islamic dispensation of wealth is treated as a deeply moral study of self and
society. The true nature of wealth in Islam requires social preferences and market
exchange mechanisms that are ethicised by human consciousness of the Moral Law.
Islam gives precise moral injunctions as to what are, and are not acceptable kinds of
wealth. They point out how individual preferences on wealth formation ought to be
utilised within the social meaning.
According to Shaikh Yusuf Talal DeLorenzo, well-known and respected Shari’ah advisor
and Islamic scholar as well as also author of the three volume “Compendium of Legal
Opinions on the Operations of Islamic Banks” the first English reference on the fatwa
(religious ruling) issued and published by the Institute, business, in the Qur'anic sense of
"profitable trade" or tijarat'un rabihah is business that brings blessings to those who
conduct it. Obviously, profits are important as ends, but the means by which those profits
are earned are even more important. Indeed, the reason for the emphasis in the Shari’ah
on proper transacting is that Islam accords great importance to the economic welfare of
society.

Profit-and-Loss Sharing
While Islam employs various practices that do not involve charging or paying interest,
the Islamic financial system promotes the concept of participation in a transaction backed
by real assets, utilising the funds at risk on a profit-and- loss-sharing basis. Such
participatory modes used by Islamic banks are known as Musharakah and Mudarabah.
This by no means implies that investments with financial institutions are necessarily
speculative. This can be excluded by careful investment policy, diversification of risk and
prudent management by Islamic financial institutions.
The concept of profit-and-loss sharing in an enterprise, as a basis of financial transactions
is a progressive one as it distinguishes good performance from the bad and the mediocre.
This concept therefore encourages better resource management. The Islamic sukuk
system is similar to bonds of capitalist system, but in sukuk, money is invested concrete
projects and profit share is distributed to clients instead of interest earned.

Pricing Transactions Linked to Interest rate Benchmark

There are continuing debates on whether the spirit of Shari`ah is being violated by the
practice of "benchmarking" linked interest rate benchmark such as London Interbank
Offered rate (LIBOR) plus an agreed mark-up in also pricing returns on Islamic finance
transactions . At a very fundamental level, the reason for the debates is the lack of
understanding to clearly discern the difference between the use of LIBOR as a

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benchmark for pricing and the use of non-Shari’ah compliant assets as a determinant for
returns.

However, benchmarking touches upon the integrity of Islamic Finance as a whole, and
the concept of Shari’ah-compliance vs Shari’ah-based approach in particular. There are
practical challenges delaying a switch to participation-based structures, such as
Musharakah and Mudarabah, that require financiers to participate in the underlying asset
in a financing transaction.

Islam's Approach to Ethical Investment

Given that many ethical funds have similar characteristics as Islamic funds, it is
important for ethical investors attracted by the appeal of Islamic principles as well as the
performance of Islamic investments to understand that there are additional prohibitions
that must be applied on the products offered. These restrictions which are essentially self-
imposed based on belief and conviction act a moral compass; the monitoring of the
prohibitions by a Religious (Shari’ah) Supervisory Board may have prevented Islamic
financial institutions to deviate from a faith-based system and absorb the shocks within
the conventional financial system.
The important principles for Islamic financial instruments for participation and
investments that require strict adherence, while providing good returns, are:
• Investments must be free of interest, speculation and gambling, all are considered
as forms of exploitation
• Investments are made in permissible activities
• Investments must be separately approved by an independent Shari’ah supervisory
board to ensure Shari’ah principles are strictly adhered to and deviations and
wayward business practice penalised, for example in Islamic finance requires
penalties to be paid to charity
"The ethical principles on which Islamic finance is based may bring banks closer to their
clients and to the true spirit which should mark every financial service," the Vatican's
official newspaper Osservatore Romano said in an article its latest March 2009 issue.

Shariah Authenticity
Shaikh Yusuf Talal DeLorenzo, Islamic scholar, position is that unless a financial product
or service can be certified as Shari’ah compliant by a competent Shari’ah supervisory
board, that product's authenticity is dubious. At that point, it will be the responsibility of
the individual investor or consumer to determine on his or her own that the product
complies with the principles and precepts of the Shari’ah.
Shari'ah Supervisory Board [Religious Board]
Islamic financial institutions must adhere to the best practices of corporate governance
however they have one extra layer of supervision in the form of religious boards. The
religious boards have both supervisory and consultative functions. Since the Shari’h
scholars on the religious boards carry great responsibility, it is important that only high
calibre scholars are appointed to the religious boards.
An Islamic financial institution is required to establish operating procedures to ensure
that no form of investment or business activity is undertaken that has not been approved
in advance by the religious board. The management is also required to periodically report

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and certify to the religious board that the actual investments and business activities
undertaken by the institution conform to forms previously approved by the religious
board.
Islamic financial institutions that offer products and services conforming to Islamic
principles must, therefore, be governed by a religious board that act as an independent
Shari’ah Supervisory Board comprising of at least three Shari’ah scholars with
specialised knowledge of the Islamic laws for transacting, fiqh al mu`amalat, in addition
to knowledge of modern business, finance and economics.
They are responsible primarily to give approval that banking and other financial products
and services offered comply with the Shari’ah and subsequent verification that of the
operations and activities of the financial institutions have complied with the Shari’ah
principles (a form of post Shari’ah audit). The Shari’ah Supervisory Board is required to
issue independently a certificate of Shari’ah compliance.
The day-to-day application of Shari’ah by the Shari’ah Supervisory Boards is two-fold.
First, in the increasingly complex and sophisticated world of modern finance they
endeavours to answer the question on whether or not proposals for new transactions or
products conform to the Shari’ah. Second, they act to a large extent in an investigatory
role in reviewing the operations of the financial institution to ensure that they comply
with the Shari’ah.
The concept of collective decision-making, in other words, decisions made by more than
one scholar, is especially important. Shari’ah Supervisory Boards function is to ensure
that decisions are not unilateral, and that difficult issues of finance receive adequate
consideration by a number of qualified people.
Shaikh Yusuf Talal DeLorenzo, Islamic scholar, position is that unless a financial product
or service can be certified as Shari’ah compliant by a competent Shari’ah supervisory
board, that product's authenticity is dubious. At that point, it will be the responsibility of
the individual investor or consumer to determine on his or her own that the product
complies with the principles and precepts of the Shari’ah.

Status of Islamic Banking

Islamic banking is no longer a novel experiment. When the concept of Islamic banking
with its ethical values was propagated, financial circles the world over treated it as a
utopian dream. Having lived for centuries under the ‘valueless’ capitalist economic
system, they asked what ethics had to do with finance?
Besides their range of equity, trade-financing and lending operations, Islamic banks also
offer a full spectrum of fee-paid retail services that do not involve interest payments,
including checking accounts, spot foreign exchange transactions, fund transfers, letters of
credit, travellers' checks, safe-deposit boxes, securities safekeeping investment
management and advice, and other normal services of modern banking. Islamic banking
because of its value-orientated ethos enables it to draw finances from both Muslims and
non-Muslims alike.
Islamic banks are evolving financial and investment instruments that are not only
profitable but are also ethically motivated. The ever-increasing application and
innovation of the methodologies associated with derivative instruments that
revolutionised the global financial industry have also led to a global financial crisis
because of the excess greed for profit and the immense uncertainty and risk associated

6
with these types of transactions. There are doubts associated with the permissibility of
derivative instruments under Islamic finance generally.
Addressing issues to resolve the global financial crisis world leaders called for a set up on
the basis of capitalism of entrepreneurship where banks finance economic development
in the real economy, as opposed to the set up on the basis of capitalism of speculation
whereby banks derive excessive profit from speculative transactions that do not make any
contribution to the real economy.

Principles of Shariah Governing Islamic Investment Funds

By Mufti Taqi Usmani
The term "Islamic Investment Fund" in this article means a joint pool wherein the
investors contribute their surplus money for the purpose of its investment to earn halal
profits in strict conformity with the precepts of Islamic Shariah. The subscribers of the
Fund may receive a document certifying their subscription and entitling them to the pro-
rated profits actually accrued to the Fund. These documents may be called "certificates"
"units" "shares" or may be given any other name, but their validity in terms of Shariah,
will always be subject to two basic conditions:
First, instead of a fixed return tied up with their face value, they must carry a pro-rated
profit actually earned by the Fund. Therefore, neither the principal nor a rate of profit
(tied up with the principal) can be guaranteed. The subscribers must enter into the fund
with a clear understanding that the return on their subscription is tied up with the actual
profit earned or loss suffered by the Fund. If the Fund earns huge profits, the return in
their subscription will increase to that proportion; however, in case the Fund suffers loss,
they will have to share it also, unless the loss is caused by the negligence or
mismanagement, in which case the management, and not the Fund, will be liable to
compensate it.
Second, the amounts so pooled together must be invested in a business acceptable to
Shariah. It means that not only the channels of investment, but also the terms agreed with
them must conform to the Islamic principles.
Keeping these basic requisites in view, the Islamic Investment Funds may accommodate
a variety of modes of investment which are discussed briefly in the following paragraphs.

Equity Fund
In an equity fund the amounts are invested in the shares of joint stock companies. The
profits are mainly achieved through the capital gains by purchasing the shares and selling
them when their prices are increased. Profits are also achieved by the dividends
distributed by the relevant companies.
It is obvious that if the main business of a company is not lawful in terms of Shariah, it is
not allowed for an Islamic Fund to purchase, hold or sell its shares, because it will entail
the direct involvement of the share holder in that prohibited business.

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Similarly the contemporary Shariah experts are almost unanimous on the point that if all
the transactions of a company are not in full conformity with Shariah, which includes that
the company borrows money on interest nor keeps its surplus in an interest bearing
account, its shares can be purchased, held and sold without any hindrance from the
Shariah side. But evidently, such companies are very rare in the contemporary stock
markets. Almost all the companies quoted in the present stock market or in some way
involved in an activity which violates the injunctions of Shariah.
Even if the main business of a company is halal, its borrowings are based on interest". On
the other hand, they keep their surplus money in an interest bearing account or purchase
interest bearing bonds or securities.
The case of such companies has been a matter of debate between the Shariah experts in
the present century. A group of the Shariah experts is of the view that it is not allowed for
a Muslim to deal in the shares of such a company, even if its main business is halal. Their
basic argument is that every share-holder of a company is a sharik (partner) of the
company, and every sharik, according to the Islamic jurisprudence, is an agent for the
other partners in the matters of the joint business. Therefore, the mere purchase of a share
of a company embodies an authorization from the share-holder to the company to carry
on its business in whatever manner the management deems fit. If it is known to the share-
holder that the company is involved in an un-Islamic transaction, still, he holds the shares
of that company, it means that he has authorized the management to proceed with that un-
Islamic transaction. In this case, he will not only be responsible for giving his consent to
an un-Islamic transaction, but that transaction will also be rightfully attributed to himself,
because the management of the company is working under his tacit authorization.
Moreover, when a company is financed on the basis of interest, its funds employed in the
business are impure. Similarly, when the company receives interest on its deposits an
impure element is necessarily included in its income which will be distributed to the
share-holders through dividends.
However, a large number of the present day scholars do not endorse this view. They
argue that a joint stock company is basically different from a simple partnership period.
In partnership, all the policy decisions are taken by the consensus of all the partners, and
each one of them has a veto power with regard to the policy of business. Therefore, all
the actions of a partnership are rightfully attributed to each partner. Conversely, the
policy decisions in a joint stock company are taken by the majority. Being composed of a
large number of share-holders, a company cannot give a veto power to each share-holder.
The opinions of individual share-holders can be overruled by a majority decision.
Therefore, each and every action taken by the company cannot be attributed to every
share-holder in his individual capacity. If a share-holder raises an objection against a
particular transaction in an annual general meeting, but his objection is overruled by the
majority, it will not be fair to conclude that he has given his consent to the transaction in
his individual capacity, specially when he intends to withdraw from the income
attributable to that transaction.
Therefore, if a company is engaged in a halal business, however, it keeps its surplus
money in an interest-bearing account, wherefrom a small incidental income of interest is
received, it does not render all the business of the company unlawful. Now, if a person
acquires the shares of such a company with clear intention that he will oppose the
incidental transaction also, and will not use that proportion of the dividend for his own

8
benefit, how can it be said that he has approved the transaction of interest and how can
that transaction be attributed to him.
Moreover, according to the principals of Islamic jurisprudence borrowing on interest is a
grave sinful act for which the borrower is responsible in the Hereafter; however, this
sinful act does not render the whole business of the borrower as haram impermissible.
The borrowed amount being recognized as owned by the borrower, anything purchased in
exchange of that money is not unlawful. Therefore, the responsibility of committing a
sinful act of borrowing on interest rests with the person who willfully indulged in a
transaction of interest, but this fact does not render the whole business of a company as
un-lawful.

Conditions for Investment in Shares

In the light of the forgoing discussion, dealing in equity shares can be acceptable in
Shariah subject to the following conditions:
1. The main business of the company is not in violation of Shariah. Therefore, it is not
permissible to acquire the shares of the companies providing financial services on
interest, like conventional banks, insurance companies, or the companies involved in
some other business not approved by the Shariah, such as the companies manufacturing,
selling or offering liquors, pork, haram meat, or involved in gambling, night club
activities, pornography etc.
2. If the main business of the companies is halal, like automobiles, textile, etc. but they
deposit there surplus amounts in a interest-bearing account or borrow money on interest,
the share holder must express his disapproval against such dealings, preferably by raising
his voice against such activities in the annual general meeting of the company.
3. If some income from interest-bearing accounts is included in the income of the
company, the proportion of such income in the dividend paid to the share-holder must be
given charity, and must not be retained by him. For example, if 5% of the whole income
of a company has come out of interest-bearing deposits, 5% of the dividend must be
given in charity.
4. The shares of a company are negotiable only if the company owns some non-liquid
assets. If all the assets of a company are in liquid form, i.e. in the form of money that
cannot be purchased or sold, except on par value, because in this case the share represents
money only and the money cannot be traded in except at par.
What should be the exact proportion of non-liquid assets of a company for the
negotiability of its shares? The contemporary scholars have different views about this
question. Some scholars are of the view that the ratio of non-liquid assets must be 51% at
the least. They argue that if such assets are less than 50%, the most of the assets are in
liquid form, therefore, all its assets should be treated as liquid on the basis of the juristic
principle: The majority deserves to be treated as the whole of a thing. Some other
scholars have opined that even if the non-liquid asset of a company or 33%, its shares can
be treated as negotiable.
The third view is based on the Hanafi jurisprudence. The principle of the Hanafi school is
that whenever an asset is a mixture of a liquid and non-liquid assets, it can be negotiable
irrespective of the proportion of its liquid part. However, this principle is subject to two
conditions.

9
First, the non-liquid part of the mixture must not be in a negligible quantity. It means that
it should be in a considerable proportion. Second, the price of the mixture should be more
than the price of the liquid amount contained therein. For example, if a share of 100
dollars represents 75 dollars, plus some fixed assets the price of the share must be more
than 75 dollars. In this case, if the price of the share is fixed as 105, it will mean that 75
dollars are in exchange of 75 dollars owned by the share and the rest of 30 dollars are in
exchange of the fixed asset. Conversely, if the price of that share fixed as 70 dollars, it
will not be allowed, because the 75 dollars owned by the share are in this case against an
amount which is less than 75. This kind of exchange falls within the definition of "riba"
and is not allowed. Similarly, if the price of the share, in the above example, is fixed as
75 dollars, it will not be permissible, because if we presume that 75 dollars owned by the
share, no part of the price can be attributed to the fixed assets owned by the share.
Therefore, some part of the price (75 dollars) must be presumed to be in exchange of the
fixed assets of the share. In this case, the remaining amount will not be adequate for the
price of 75 dollars. For this reason the transaction will not be valid.
However, in practical terms, this is merely a theoretical possibility, because it is difficult
to imagine a situation where a price of the share goes lower than its liquid assets.
Subject to these conditions, the purchase and sale of shares is permissible in Shariah. An
Islamic Equity Fund can be established on this basis. The subscribers to the Fund will be
treated in Shariah as partners "inter se." All the subscription amounts will form a joint
pool and will be invested in purchasing the shares of different companies. The profits can
accrue either through dividends distributed by the relevant companies or through the
appreciation in the prices of the shares. In the first case i.e. where the profits earned
through dividends, a certain proportion of the dividend, which corresponds to the
proportion of interest earned by the company, must be given in charity. The
contemporary Islamic Funds have termed this process as "purification."
The Shariah scholars have different views about whether the "purification" is necessary
where the profits are made through capital gains (i.e. by purchasing the shares at a lower
price and selling them at a higher price). Some scholars are of the view that even in the
case of capital gains the process of "purification" is necessary, because the market price
of the share may reflect an element of interest included in the assets of the company. The
other view is that no purification is required if the share is sold, even if it results in a
capital gain. The reason is that no specific amount of price can be allocated for the
interest received by the company. It is obvious if all the above requirements of the halal
shares are observed, the most of the assets of the company are halal, and a very small
proportion of its assets may have been created by the income of interest. This small
proportion is not only unknown, but also a negligible as compared to the bulk of the
assets of the company. Therefore, the price of the share, in fact, is against the bulk of the
assets, and not against such a small proportion. The whole price of the share therefore,
may be taken as the price of the halal assets only.
Although this second view is not without force, yet the first view is more cautious and far
from doubts. Particularly, it is more equitable in an open-ended equity fund because if the
purification is not carried out on the appreciation and a person redeems his unit of the
Fund at a time when no dividend is received by it, no amount of purification will be
deducted from its price, even though the price of the unit may have increased due to the
appreciation in the prices of the shares held by the fund. Conversely, when a person

10
redeems his unit of the Fund at a time when no dividend is received by it, no amount of
purification will be deducted from its price, even though the price of the unit may have
increased due to the appreciation in the prices of the shares held by the fund.
On the contrary, if purification is carried out both on dividend and capital gains, all the
unit-holders will be treated at par with the regard to the deduction of the amounts of
purification. Therefore, it is not only free from doubts but also more equitable for all the
unit-holders to carry out purification in the capital gains. This purification may be carried
out on the basis of an average percentage of the interest earned by the companies
included in the portfolio.
The management of the fund may be carried out in two alternative ways. The managers
of the Fund may act as mudaribs for the subscriber. In this case a certain percentage of
the annual profit accrued to the Fund may be determined as the reward of the
management, meaning thereby that the management will get its share only if the fund has
earned some profit. If there is no profit in the fund, the management will deserve nothing,
but the share of the management will increase with the increase of profits.
The second option of the management is to act as an agent for the subscribers. In this
case, the management may be given a pre agreed fee for its services. This fee may be
fixed in lump sum or as a monthly or annual remuneration. According to the
contemporary Shariah scholars, the fee can also be based on a percentage of the net asset
value of the fund. For example, it may be agreed that the management will get 2% or 3%
of the net asset value of the fund at the end of every financial year.
However, it is necessary in Shariah to determine any of the aforesaid methods before the
launch of the fund. The practical way for this would be to disclose in the prospectus of
the fund on what basis the fees of the management will be paid. It is generally presumed
that whoever subscribes to the fund agrees with the terms mentioned in the prospectus.
Therefore, the manner of paying the management will be taken as agreed upon on all the
subscribers.

Ijarah Fund
Another type of Islamic Fund may be an ijarah fund. Ijarah means leasing. In this fund
the subscription amounts are used to purchase assets like real estate, motor vehicles, or
other equipment for the purpose of leasing them out to their ultimate users. The
ownership of these assets remains with the Fund and the rentals are charged from the
users. These rentals are the source of income for the fund which is distributed pro rated to
the subscribers. Each subscriber is given a certificate to evidence his subscription and to
ensure his entitlement to the pro rated share in the income. These certificates may be
preferably called "sukuk" -- a term recognized in the traditional Islamic jurisprudence.
Since these sukuk represent the pro rated ownership of their holders in the tangible assets
of the fund, and not the liquid amounts or debts, they are fully negotiable and can be sold
and purchased in the secondary market. Anyone who purchases these sukuk replaces the
sellers in the pro rated ownership of the relevant assets and all the rights and obligations
of the original subscriber are passed on to him. The price of these sukuk will be
determined on the basis of market forces, and are normally based on their profitability.
However, it should be kept in mind that the contracts of leasing must conform to the
principles of Shariah which substantially differ from the terms and conditions used in the
agreements of the conventional financial leases.

11
"Islamic Finance." However, some basic principles are summarized here: 1. The leased
assets must have some usufruct, and the rental must be charged only from that point of
time when the usufruct is handed over to the lessee.
2. The leased assets must be of a nature that their halal (permissible) use is possible.
3. The lessor must undertake all the responsibilities consequent to the ownership of the
assets.
4. The rental must be fixed and known to the parties right at the beginning of the contract.
In this type of the fund the management should act as an agent of the subscribers and
should be paid a fee for his services. The management fee may be a fixed amount or a
proportion of the rentals received. Most of the Muslim jurists are of the view that such a
fund cannot be created on the basis of mudarabah, because mudarabah, according to
them, is restricted to the sale of commodities and does not extend to the business of
services and leases. However, in the Hanbali school, mudarabah can be affected in
services and leases also. This view has been preferred by a number of contemporary
scholars.

Commodity Fund
Another possible type of Islamic Funds may be a commodity fund. In the fund of this
type the subscription amounts are used in purchasing different commodities for the
purpose of the resale. The profits generated by the sale are the income of the fund which
is distributed pro rated among the subscribers. In order to make this fund acceptable to
Shariah, it is necessary that all the rules governing the transactions and fully complied
with. For example:
1. The commodity must be owned by the seller at the time of sale, therefore, short sales
where a person sells a commodity before he owns it are not allowed in Shariah.
2. Forward sales are not allowed except in the case of salam and istisna' (For their full
details my book "Islamic Finance" may be consulted).
3. The commodities must be halal, therefore, it is not allowed to deal in wines, pork, or
other prohibited materials.
4. The seller must have physical or constructive possession or the commodity he wants to
sell. (Constructive possession includes any act by which the risk of the commodity is
passed on to the purchaser).
5. The price of the commodity must be fixed and known to the parties. Any price which
is uncertain or is tied up with an uncertain event renders the sale invalid.
In view of the above and similar other conditions, it may easily be understood that the
transactions prevalent in the contemporary commodity markets, specially in the futures
commodity markets do not comply with these conditions. Therefore, an Islamic
Commodity Fund cannot enter into such transactions. However, if there are genuine
commodity transactions observing all the requirements of Shariah, including the above
conditions, a commodity fund may well be established. The units of such fund can also
be traded in with the condition that the portfolio owns some commodities at all times.

12
Murabahah Fund
"Murabahah" is a specific kind of sale where the commodities are sold on a cost-plus
basis. This kind of sale has been adopted by the contemporary Islamic banks and
financial institutions as a mode of financing. They purchase the commodity for the
benefit of their clients, then sell it to them on the basis of deferred payment at an agreed
margin of profit added to the cost. If a fund is created to undertake this kind of sale, it
should be a closed-end fund and its units can not be negotiable in a secondary market.
The reason is that in the in the case Murabahah, as undertaken by the present financial
institutions, the commodities are sold to the clients immediately after their purchase from
the original supplier, while the price being on deferred payment basis becomes a debt
payable by the client. Therefore, the portfolio of Murabahah does not own any tangible
assets, rather it comprises of either cash or the receivable debts, and both these things are
not negotiable, as explained earlier. If they are exchanged for money, it must be at par
value.

Bai'-al-dain
Here comes the question whether or not Bai'-al-dain is allowed in Shariah. Dain means
"debt" and Bai' means sale. Bai'-al-dain, therefore, connotes the sale of debt. If a person
has a debt receivable from a person and he wants to sell it at a discount, as normally
happens in the bill of exchange, it is termed in Shariah as Bai'-al-dain. The traditional
Muslim jurists (fuqaha') are unanimous on the point that Bai'-al-dain is not allowed in
Shariah. The overwhelming majority of the contemporary Muslim scholars are of the
same view. However, some scholars of Malaysia have allowed this kind of sale. They
normally refer to the ruling of Shaf'ite school wherein it is held that the sale of debt is
allowed, but they do not pay attention to the facts that the Shaf'ite jurists have allowed it
only in a case where a debt is sold on its par value.
In fact, the prohibition of Bai-al-dain is a logical consequence of the prohibition of "riba"
or interest. A "debt" receivable in monetary terms corresponds to money, and every
transaction where money is exchanged from the same denomination of money, the price
must be at par value. Any increase or decrease from one side is tantamount to "riba" and
can never be allowed in Shariah. Some scholars argue that the permissibility of Bai'-al
dain is restricted to a case where the debt is created through a sale of a commodity. In this
case, they say, the debt represents the sold commodity and its sale may be taken as a sale
of the commodity. The arguments, however, is devoid of force. For, once the commodity
is sold, its ownership is passed on to the purchaser and it is no longer commodity of the
seller. What the seller owns is nothing other than money, therefore if he sells the debt, it
is no more than a sale of money and it cannot be termed by any stretch of imagination as
the sale of the commodity. That is why this view has not been accepted by the
overwhelming majority of the contemporary scholars. The Islamic Fiqh Academy of
Jeddah which is the largest representative body of the Shariah scholars and is represented
by all the Muslim countries, including Malaysia, has approved the prohibition of Bai'-al-
dain unanimously without a single decent.

13
Mixed Fund
Another type of Islamic Fund maybe of a nature where the subscription amounts are
employed in different types of investments, like equities, leasing, commodities, etc. This
may be called a Mixed Islamic Fund. In this case if the tangible assets of the Fund are
more than 51% while the liquidity and debts are less than 50% the units of the fund may
be negotiable. However, if the proportion of liquidity and debts exceeds 50%, its units
cannot be traded in according to the majority of the contemporary scholars. In this case
the Fund must be a closed-end Fund.

Introduction
It was a momentous event, as big as the creation of the country itself. On 14 Ramadan
1420, the Shariah Appellate Bench of the Supreme Court of Pakistan gave its landmark
decision banning interest in all its forms and by whatever name it may be called. Thus
fifty-five years after its creation in the name of Islam (27 Ramadan 1365), Pakistan
became the first Muslim country to officially declare modern (and rampant) bank interest
as ar-riba, declared haram by Qur'an.
The court also specified a step by step approach to rid the country of the evil of interest.
As a consequence of this judgement, certain laws will cease to take effect from 31 March
2000, some other laws from 31 July 2000, and all other laws permitting or condoning
interest from 30 June 2001.
The Federal Shariah Court of Pakistan had declared the laws allowing interest repugnant
to Islam in 1991. The Federal Government of Pakistan and certain banks and financial
institutions filed 67 appeals against this judgment in the Shariah Appellate Bench of the
Supreme Court. This decision is a disposition of that appeal. It is the final verdict of
Pakistan's highest court.
The Shariah Appellate Bench consisted of 1) Mr. Justice Khalil-ur-Rahman, 2) Mr.
Justice Munir A Shaikh, 3) Mr. Justice Wajeehuddin Ahmad, and 4) Maulana Justice
Muhammad Taqi Usmani.
The full judgment of the court consists of about 1100 pages. (An unprecedented length in
the history of Pakistan's Supreme Court decisions). The main part of the judgment was
written by Mr. Justice Khalil-ur Rahman (550 pages) and Maulana Justice Mufti Taqi
Usmani (250 pages). A note of 98 pages was written by Mr. Justice Wajeehuddin Ahmad.
The order of the court consists of 106 pages.
We reproduce here the text written by Maulana Justice Taqi Usmani. This is an extremely
valuable document that should benefit the entire world and not just Pakistan.
World powers and their obedient servants in Pakistan have already shown their
displeasure with this historic judgment --- as it will end their exploitative grip on the
country. The judgment is considered a case of defiance by a slave, and the slave masters
don't like it. They will do everything they can to derail its implementation. This will most
certainly include propaganda campaigns. It is the responsibility of all the Muslims
throughout the world to educate themselves on the issue and put their weight solidly
behind this judgment. (Editor)
1. All these appeals arise out of the same judgment of the learned Federal Shariat Court
dated 14 November 1991, whereby the Court has declared a number of laws of the
country repugnant to the Injunctions of Islam as they have provided for charging or
paying interest, which according to the findings of the learned Federal Shariat Court, falls

14
within the definition of riba clearly prohibited by the Holy Qur'an.
2. The basic issues involved in all these appeals being similar, all of them were heard
together and are being disposed of by this single judgment.
3. Most of the appellants as well as some juris-consults argued before us that interest-
based commercial transactions were invented by the modern business, and their history
does not go back more than 400 years, therefore they are not covered by the term 'riba'
used by the Holy Qur'an, and the prohibition of riba does not include the prohibition of
interest as in vogue in modern transactions.
4. This view is sought to be supported by five different lines of argument adopted before
us against the prohibition of interest.
5. The first approach to interpret the term riba, as adapted by some of the appellants, was
that the verses of the Holy Qur'an which prohibit riba were revealed in the last days of
the life of the Holy Prophet, Sall-Allahu alayhi wa sallam, and he did not have an
opportunity to interpret them properly and therefore no hard and fast definition of the
term riba can be found in the Holy Qur'an or in the Sunnah of the Holy Prophet, Sall-
Allahu alayhi wa sallam. Since the term remained ambiguous in nature, it falls within the
area of Mutashabihat and its correct meaning is unknown. According to this approach the
prohibition of riba should he restricted to the limited transactions expressly mentioned in
the Hadith literature and the principle cannot be extended to the modern banking system
which was not even imaginable at the time of revelation of the verses.
6. The second line of argument runs on the basis that the word 'riba' refers only to the
usurious loans on which an excessive rate of interest used to be charged by the creditors
which would entail exploitation. As far the modern banking interest, it cannot be termed
as 'riba' if the rate of interest is not excessive or exploitative.
7. The third argument differentiates between consumption loans and commercial loans.
According to this approach the word "Al-Riba" used in the Holy Qur'an is restricted to the
increased amount charged on the consumption loans used to be taken by the poor people
for their day to day needs. These poor people deserved sympathetic attitude on
humanitarian grounds, but the rich people exploited their miserable condition to charge
heavy amounts from them in the form of usury. The Holy Qur'an has taken this practice
as a severe offence against humanity and declared war against those involved in such
abominated transactions. So far as the modern commercial loans are concerned, they
were neither in vogue in the days of the Holy Prophet, Sall-Allahu alayhi wa sallam, nor
has the Holy Qur'an addressed them while prohibiting 'riba'. Even the basic philosophy
underlying the prohibition of 'riba' cannot be applied to these commercial and productive
loans where the debtors are not poor people. In most cases they are wealthy or at least
economically well-off and the loans taken by them are generally used for generating
profits. Therefore, any increase charged from them by the creditors cannot he termed as
Zulm (injustice) which was the basic cause of the prohibition of 'riba'.
8. The fourth theory advanced during the arguments was that the Holy Qur'an has
prohibited riba-al-jahiliyya only which, according to a number of traditions, was a
particular transaction of loan where no additional amount over and above the principal
was stipulated in the agreement of loan. However, if the debtor could not pay off the loan
at its due date, the creditor would give him more time against charging an additional
amount. According to this theory, if an increased amount is stipulated in the initial
agreement of loan, it does not constitute riba al-Quran. However, it does fall in the

15
definition of riba-al-fadl, prohibited by the Sunnah. Its prohibition is of a lesser degree
which can be termed as makrooh and not haram. Therefore, this prohibition may be
relaxed in cases of genuine need and it does not apply to the non-Muslims. Being a
special law applicable to the Muslims only, it falls within the category of 'Muslim
Personal Law', which falls outside the jurisdiction of the Federal Shariat Court, as
contemplated in Article 203(B) of the Constitution of Pakistan.
9. The fifth way of argument was that although the modern interest-based transactions are
covered by the prohibition of 'riba', yet the commercial interest being the back-bone of
the modern economic activities throughout the world, no country can live without being
involved in interest-based transactions and it will be a suicidal act to abolish interest from
domestic and foreign transactions. Islam, being a practical religion, recognizes the
principle of necessity and it has allowed even to eat pork in extreme situation where one
cannot live without eating it. The same principle of necessity should be applied to the
interest-based transactions also, and on the basis of this necessity the laws permitting the
charge of interest should not be declared repugnant to the injunctions of Islam.
10. All these different sets of arguments led us to resolve the main issue i.e. whether or
not commercial interest of modern financial system falls within the definition of riba
prohibited by the Holy Qur'an, and if it does, whether they can he allowed on the basis of
necessity. This also led us to examine whether the modern financial transactions can be
designed without interest and whether or not the proposed alternatives are feasible
keeping in view the modern structure of commerce and finance. In order to resolve these
issues we invited a number of experts as juris-consults consisting of Shariah scholars,
economists, bankers, accountants and representatives of modern business and trade who
have provided assistance to the Court in their respective areas of specialization.

An Objective Study of the Qur'anic Verses Dealing with Riba

11. Before analyzing the above-mentioned arguments, let us undertake an objective study
of the verses of the Holy Qur'an about riba. There are four different sets of verses which
were revealed on different occasions.
12. First, in Surah Ar-Rum, a Makkan Surah wherein the term riba finds mention in the
following words:

"And whatever riba you give so that it may increase in the wealth of the
people, it does not increase with Allah." [Ar-Rum 30:39]
13. The second verse is of Surah Al-Nisaa where the term riba is used in the context of
sinful acts of the Jews in the following words:

"And because of their charging riba while they were prohibited from it."
[An-Nisaa 4:161]
14. In the third verse of Surah Al-i-'Imran the prohibition of riba is laid down in the
following words:

16
 "O those who believe do not eat up riba doubled and redoubled." [Al-
i-'Imran 3:130]
15. The following set of verses is found in the Surah Al-Baqarah in the following words:

"Those who take interest will not stand but as stands whom the demon has
driven crazy by his touch. That is because they have said: 'Trading is but
like riba'. And Allah has permitted trading and prohibited riba. So,
whoever receives an advice from his Lord and stops, he is allowed what
has passed, and his matter is up to Allah. And the ones who revert back,
those are the people of Fire. There they remain for ever.
Allah destroys riba and nourishes charities. And Allah does not like any
sinful disbeliever. Surely those who believe and do good deeds, establish

17
 Salah and pay Zakah, have their reward with their Lord, and there is no
fear for them, nor shall they grieve.
O those who believe, fear Allah and give up what still remains of the riba
if you are believers. But if you do not, then listen to the declaration of war
from Allah and His Messenger. And if you repent, yours is your principal.
Neither you wrong, nor be wronged. And if there be one in misery, then
deferment till ease. And that you leave it as alms is far better for you, if
you really know. And be fearful of a day when you shall be returned to
Allah, then everybody shall be paid, in full, what he has earned. And they
shall not be wronged." [Al-Baqarah 2:275-281]

Historical Analysis of the Verses of Riba

16. Before proceeding further it will be appropriate to understand these verses in their
chronological order.

Surah Ar-Rum
17. First of these verses is a part of Surah Ar-Rum which was undisputedly revealed in
Makkah. This verse is not of prohibitive nature. It simply says that the riba does not
increase with Allah i.e. it carries no reward in the Hereafter. Many commentators of the
Holy Qur'an are of the opinion that the word riba in this verse does not refer to usury or
interest. Ibn Jarir Al-Tabari (D310 AH), the most famous exegete of the Holy Qur'an,
reports from Ibn Abbas, Radi-Allahu anhu, and several Tabi'in like Saeed Ibn Jubair,
Mujahid, Tawoos, Qatadah, Zahhak, and Ibrahim Al-Nakha'i that the word riba in this
verse means a gift offered by someone to a person with the intention that the latter will
give him in return a greater gift. However, some commentators of the Holy Qur'an have
taken this word to mean usury. This view is attributed to Hasan Al-Basri as reported by
Ibn Al-Jawzi. If the word riba used in this verse is taken to mean usury according to this
view, which seems more probable, because the word of 'riba' used in other places carries
the same meaning, there is no specific prohibition against it in the verse. The most it has
emphasized is that riba does not carry a reward from Allah in the Hereafter. Therefore,
this verse does not contain a prohibition against riba. However, it may be taken as a
subtle indication to the fact that the practice is not favored by Allah.

Surah An-Nisaa
18. The second verse is of Surah al-Nisaa where, while listing the evil deeds of Jews, it is
mentioned that they used to take riba which was prohibited for them. The exact time of
this verse is very difficult to ascertain. The commentators are mostly silent on this point,
but the context in which the verse was revealed suggests that it would have been revealed
before the 4th year of Hijra. Verse 153 of the Surah Al-Nisaa is as follows:

"The People of the Book ask you to bring down upon them a Book from
the heaven." [An-Nisaa 4:153]
19. This verse implies that all the forthcoming verses were revealed in answer to the

18
argumentation of the Jews who came to the Holy Prophet, Sall-Allahu alayhi wa sallam,
and asked him to bring down a Book from the heavens like the one given to the Prophet
Musa (Moses), alayhi salam. It means that this series of verses was revealed at a time
when Jews were abundantly present in Madina and were in a position to argue with the
Holy Prophet, Sall-Allahu alayhi wa sallam. Since most of the Jews had left Madinah
after 4th year from Hijra, this verse seems to have been revealed before that. Here the
word riba undoubtedly refers to usury because it was really prohibited for the Jews. This
prohibition is still contained in the Old Testament of the Bible. But it cannot be taken as a
direct and explicit prohibition of riba for the Muslims. It simply mentions that riba was
prohibited for the Jews but they did not comply with the prohibition in their practical
lives. The inference, though, would be that it was a sinful act for the Muslims also,
otherwise they had no occasion to blame the Jews for the practice.

Surah Al-i-'Imran
20. The third verse is of Surah Al-i-'Imran which is estimated to have been revealed
sometime in the 2nd year after Hijra, because the context of the preceding and succeeding
verses refers to the battle of Uhud which took place in the 2nd year after Hijra. This verse
contains a clear prohibition for the Muslims and it can safely be said that it is the first
verse of the Holy Qur'an through which the practice of riba was forbidden for the
Muslims in express terms. That is why Hafidh Ibn Hajar Al-Asqalani, the most famous
commentator of Sahih Al-Bukhari, has opined that the prohibition of riba was declared
sometime around the battle of Uhud. Some commentators have also pointed out the
reason why this verse was revealed in the context of the battle of Uhud. They say that the
invaders of Makkah had financed their army by taking usurious loans and had in this way
arranged a lot of arms against Muslims. It was apprehended that it may induce the
Muslims to arrange for arms on the same pattern by taking usurious loans from the
people. In order to prevent them from this approach the verse was revealed containing a
clear-cut prohibition of riba.
21. That the prohibition of riba had been imposed sometime around the battle of Uhud
finds further support from an event reported by Abu Dawood in his As-Sunan from the
noble companion, Abu Hurairah, Radi-Allahu anhu. The report says that Amr ibn Aqyash
was a person who had advanced some loans on the basis of interest. He was inclined to
embrace Islam but was reluctant to do so on the apprehension that after embracing Islam
he would lose the amount of interest and therefore he delayed accepting Islam. In the
meantime the battle of Uhud broke up whereby he decided not to delay embracing Islam
and came to the battlefield, started fighting on behalf of Muslims and achieved the rank
of a Shaheed (martyr) in the same battle.
22. This tradition clearly shows that riba was prohibited before the battle of Uhud and it
was the basic cause for the reluctance of Amr ibn Aqyash to embrace Islam.
23. The fourth set of verses is contained in Surah Al-Baqarah where the severity of the
prohibition of riba has been elaborated in detail. The background of the revelation of
these verses is that after the conquest of Makkah, the Holy Prophet, Sall-Allahu alayhi wa
sallam, had declared as void all the amounts of riba that were due at that time. The
declaration embodied that nobody could claim any interest on any loan advanced by him.
Then the Holy Prophet, Sall-Allahu alayhi wa sallam, proceeded to Taif which could not
be conquered, but later on the inhabitants of Taif who belonged mostly to the tribe of

19
Thaqif came to him and after embracing Islam surrendered to the Holy Prophet, Sall-
Allahu alayhi wa sallam, and entered into a treaty with him. One of the proposed clauses
of treaty was that Banu Thaqif will not forego the amounts of interest due on their debtors
but their creditors will forego the amount of interest. The Holy Prophet, Sall-Allahu
alayhi wa sallam, instead of signing that treaty simply wrote a sentence on the proposed
draft that Banu Thaqif will have the same rights as the Muslims have. Banu Thaqif
having the impression that their proposed treaty was accepted by the Holy Prophet, Sall-
Allahu alayhi wa sallam, claimed the amount of interest from Banu Amr Ibn-al-
Mughirah, but they declined to pay interest on the ground that riba was prohibited after
Islam. The matter was placed before Attaab ibn Aseed, Radi-Allahu anhu, the governor
of Makkah. Banu Thaqif argued that according to the treaty they are not bound to forego
the amounts of interest. Attaab ibn Aseed, Radi-Allahu anhu, placed the matter before the
Holy Prophet, Sall-Allahu alayhi wa sallam, on which the following verses of Surah Al-
Baqarah were revealed:

"O those who believe, fear Allah and give up what still remains of the riba
if you are believers. But if you do not, then listen to the declaration of war
from Allah and His Messenger. And if you repent, yours is your principal.
Neither you wrong, nor be wronged." [Al-Baqarah 2:278-279]
24. At that point of time Banu Thaqif surrendered and said we have no power to wage
war against Allah and His Messenger.

The Time of Prohibition of Riba

25. This study of the verses of the Holy Qur'an in the light of their historical background
clearly proves that riba was prohibited at least in the 2nd year of Hijra. It is rather
doubtful whether or not it was prohibited before that. If the word riba in the verses of
Surah Ar-Rum is taken to mean usury as interpreted by a number of authorities, it would
mean that the practice of riba was discarded by the Holy Qur'an in Makkan period. That
is why a number of scholars are of the view that riba was never allowed in Islam. It was
prohibited from the very beginning but the severity of prohibition was not emphasized
during that period because Muslims were being persecuted by the infidels of Makkah and
their major focus was on establishing and defending the basic articles of faith and they
had no occasion to indulge in the practice of riba. Be that as it may, the fact that cannot
be denied is that the express prohibition of riba was undoubtedly imposed in the 2nd year
of Hijra.
26. Some appellants and juris-consults have assailed this statement and urged that the
prohibition of riba was imposed in the last year of the life of the Holy Prophet, Sall-
Allahu alayhi wa sallam. They tried to support this view on three different traditions:
27. Firstly, it has been reported in a number of traditions that the Holy Prophet, Sall-
Allahu alayhi wa sallam, announced the prohibition of riba in his last sermon during his

20
last Hajj. The Holy Prophet, Sall-Allahu alayhi wa sallam, not only prohibited riba on
that occasion but had also declared that the first riba decreed to be void is the riba
payable to his uncle Abbas ibn Abdul Muttalib, Radi-Allahu anhu. This declaration
shows that the first transaction declared to be void was that of Abbas ibn Abdul Muttalib,
Radi-Allahu anhu, which means that the prohibition of riba was not effective before the
last Hajj of the Holy Prophet, Sall-Allahu alayhi wa sallam, i.e. before 10th year after
Hijra.
28. A deeper study of the relevant material reveals that this argument is misconceived. In
fact the prohibition of riba was effective at least from the 2nd year of Hijra but the Holy
Prophet, Sall-Allahu alayhi wa sallam, deemed it necessary to announce the basic
injunctions of Islam at the time of his last sermon which was the most attended gathering
of his followers. To avail this opportunity, he announced the prohibition of a large
number of practices prevalent in the days of Jahiliyya which were prohibited in Islam, but
it did never mean that these practices were not prohibited before that point in time. For
example, the Holy Prophet, Sall-Allahu alayhi wa sallam, has emphasized on the sanctity
of human life and honor. He announced the prohibition of liquor and warned the Muslims
against maltreatment of women, against back-biting and mutual quarrels. Obviously all
these injunctions were effective since long ago, but the Holy Prophet, Sall-Allahu alayhi
wa sallam, announced them at the time of his last sermon so that all the audience may be
fully aware of them and nobody could plead ignorance about these injunctions. The same
is true about riba. It was prohibited long ago, but the announcement of its prohibition was
repeated in express terms on that occasion also. At the same time the Holy Prophet, Sall-
Allahu alayhi wa sallam, declared that no claim of riba will be entertained forthwith. It
was a time when large number of Arab tribes were entering the fold of Islam throughout
the peninsula. The practice of riba was rampant among them and it was apprehended that
they would continue claiming the amounts of usury from one another, therefore, the Holy
Prophet, Sall-Allahu alayhi wa sallam, deemed it fit to announce not only the prohibition
of riba but also that all the previous transactions of riba will no more be honored. It was
in this context that he declared the amounts of riba payable to his uncle Abbas ibn Abdul
Muttalib, Radi-Allahu anhu, as void. It should be kept in mind that his uncle Abbas,
Radi-Allahu anhu, embraced Islam in the 8th year after Hijrah shortly before the conquest
of Makkah. Before embracing Islam he used to advance loans on the basis of interest and
his debtors owed him huge amounts. It seems that after the conquest of Makkah he
migrated to Madinah and could not settle his transactions with his debtors. Therefore,
when he traveled for Hajj along with Holy Prophet, Sall-Allahu alayhi wa sallam, it was
the first occasion when he could settle his transactions, hence, the Holy Prophet, Sall-
Allahu alayhi wa sallam, declared that the whole amount of riba payable to his uncle
Abbas, Radi-Allahu anhu, was void and no more payable. The words "first riba"
occurring in this declaration do not mean that no riba was declared void before it. What it
means is simply that this is the first amount of riba which is being declared as void at that
occasion of the last sermon. We have already quoted the case of Banu Thaqif who
demanded interest from their debtors after the conquest of Makkah (i.e. two years before
the last Hajj) and the amounts of interest claimed by them were held to be void. It is
therefore, not correct to say that the riba of Abbas bin Abdul Muttalib, Radi-Allahu anhu,
was the first ever riba which was declared void, nor that the prohibition of riba was
enforced for the first time at the time of the last Hajj.

21
The Last Verse of the Qur'an
29. Secondly, the view that riba was prohibited in the last days of the Holy Prophet, Sall-
Allahu alayhi wa sallam, is sought to be supported by another tradition of Imam Bukhari
where he has reported from Abdullah ibn Abbas, Radi-Allahu anhu, that he said:

"The last verse of the Holy Qur'an which was revealed on the Holy
Prophet, Sall-Allahu alayhi wa sallam, was the verse of riba."
30. But in the first place Abdullah ibn Abbas, Radi-Allahu anhu, is not saying that the
last injunction of Shar'iah was the prohibition of riba. All he is saying is that the last
verse revealed on the Holy Prophet, Sall-Allahu alayhi wa sallam, was the verse of riba
which in this sentence undoubtedly means the verse of Surah Al-Baqarah already quoted
above. The words "verse of riba" is used as a title to it.
Therefore, even if the above statement of Abdullah ibn Abbas, Radi-Allahu anhu, is taken
at its face value, it is an admission on his own part that the verses of Surah Al-i-'Imran,
Surah An-Nisaa and Surah Ar-Rum were revealed before this verse of Surah Al-Baqarah,
which clearly indicates that the prohibition of riba was already imposed before the
revelation of these verses. It is, therefore, evident that this statement of Abdullah ibn
Abbas, Radi-Allahu anhu, cannot be taken to mean that prohibition of riba was imposed
in the last days of the life of the Holy Prophet, Sall-Allahu alayhi wa sallam.
31. Moreover, the same statement of Abdullah ibn Abbas, Radi-Allahu anhu, is reported
by a number of other scholars, like Ibn Jarir Al-Tabari, who have explained that this
statement of Abdullah ibn Abbas, Radi-Allahu anhu, refers only to the following verse:

"And be fearful of a day when you shall be returned to Allah, then

everybody shall be paid, in full, what he has earned. And they shall not be
wronged." [Al-Baqarah 2:281]
32. Since this verse is placed in the present order immediately after the verses of riba
which are 275-280, Abdullah ibn Abbas Radi-Allahu anhu, has termed it as a verse of
riba. That is why Imam Bukhari has related this statement of Abdullah ibn Abbas, Radi-
Allahu anhu, in that chapter of his Kitab-al-Tafseer which deals with the commentary on
verse 281 only and not in the chapters 49-52 which deal with verses 275-280. In the light
of this explanation, it is more probable that according to Abdullah ibn Abbas, Radi-
Allahu anhu, the verses mentioning the severity of the prohibition of riba (verses 275-280
of Surah Al-Baqarah) were already revealed and it was only verse 281 which was
revealed in the last days of the Holy Prophet, Sall-Allahu alayhi wa sallam. This view
finds further support from the fact that verse 278 was certainly revealed soon after the
conquest of Makkah when the tribe of Thaqif had claimed the amount of riba outstanding
toward Banu Mughira as already mentioned in detail. The conquest of Makkah was in the
8th year of Hijra while the Holy Prophet, Sall-Allahu alayhi wa sallam, passed away in
the 11th year of Hijra. How can it be imagined that no other verse of Holy Qur'an was

22
revealed during this long period of more than 3 years. This presumption which is false on
the face of it is very difficult to be attributed to a person like Abdullah ibn Abbas, Radi-
Allahu anhu. It is, therefore, almost certain that by the verse of riba he did not mean any
verse other than verse 281 which according to him was revealed separately in the last
days of the Holy Prophet, Sall-Allahu alayhi wa sallam, and this too is the personal
opinion of Abdullah ibn Abbas, Radi-Allahu anhu. Some other Sahabah have identified
some other verses of the Holy Qur'an as being the last revealed verses. The issue has been
discussed in detail by Al-Suyyuti in his Al-Itqan and many other books of Tafseer and
Hadith.
33. This explanation is more than sufficient to prove that the prohibition of riba was
imposed long before the last days of the Holy Prophet, Sall-Allahu alayhi wa sallam.
34. The upshot of the above discussion is that although some indications of displeasure
against riba were given in the Makkan period also, but the express prohibition of riba
was revealed in the Holy Qur'an sometime around the battle of Uhud in the second year
of Hijra.
35. The third tradition relied upon by some appellants for their claim that the prohibition
of riba came in the last days of the Holy Prophet, Sall-Allahu alayhi wa sallam, is a
statement of Sayyidna Umar, Radi-Allahu anhu. We shall analyze this statement later on
in para 56 in greater detail insha-Allah.

What is Meant by Riba?

36. Now we come to the question what is meant by riba? The Holy Qur'an did not give
any definition for the term for the simple reason that it was well known to its immediate
audience. It is like the prohibition of pork, liquor, gambling, adultery etc, which were
imposed without giving any hard and fast definition because all these terms were well
known and there was no ambiguity in their meaning. Similar was the case of riba. It was
not a term foreign to Arabs. They all used the term in their mutual transactions. Not only
Arabs but all the previous societies used to practice it in their financial dealings and
nobody had any confusion about its exact sense. We have already quoted the verse of
Surah An-Nisaa where the Holy Qur'an has reproached the Jews for their taking riba
while it was prohibited for them. Here this practice is termed as riba in the same manner
as it is termed in Surah Al-i-'Imran or Surah Al-Baqarah. It means that the practice of
riba prohibited for Muslims was the same as was prohibited for the Jews.

Riba in the Bible

37. This prohibition is still available in the Old Testament of the Bible. The following
excerpts may be quoted with advantage:
"Thou shalt not lend upon usury to thy brother; usury of money, usury of
victuals, usury of anything that is lent upon usury." [Deuteronomy 23:19]
"Lord, who shall abide in thy tabernacle? Who shall dwell in thy holy hill?
He that walketh uprightly, and worketh righteousness and speaketh the
truth in his heart. He that putteth not out of his money to usury, nor taketh
reward against the innocent." [Psalms 15:1, 2, 5]
"He that by usury and unjust gain increaseth his substance, he shall gather
it for him that will pity the poor." [Proverbs 28:8]
"Then I consulted with myself, and I rebuked the nobles, and rules and

23
 said unto them, Ye exact usury, every one of his brother. And I set a great
assembly against them." [Nehemiah 5:7]
"He that hath not given forth upon usury, neither hath taken any increase,
that hath withdrawn his hand from iniguity, hath executed true judgment
between man and man, hath walked in my statues, and hath kept my
judgments, to deal truly; he is just. He shall surely live, said the Lord
God." [Ezekiel 18:8.9]
"In thee have they taken gifts to shed blood; thou hast taken usury and
increase, and though hast greedily gained of thy neighbors by extortion,
and hast forgotten me, said the Lord God." [Ezekiel 22:12]
38. In these excerpts of the Bible the word usury is used in the sense of any amount
claimed by the creditor over and above the principal advanced by him to the debtor. The
word riba used in the Holy Qur'an carries the same meaning because the verse of Surah
An-Nisaa explicitly mentions that riba was prohibited for the Jews also.

The Definition of Riba as given by the Exegetes of the Holy Qur'an

39. Moreover, the literature of Hadith while explaining the word riba has mentioned in
detail the transactions of riba which were used to be effected by the Arabs of Jahiliyya on
the basis of which the earliest commentators of the Holy Qur'an have defined riba in
clear terms.
40. Imam Abubakr Al-Jassas (D.380 AH) in his famous work Ahkamul Qur'an has
explained riba in the following words:

"And the riba which was known to and practiced by the Arabs was that
they used to advance loan in the form of Dirham (silver coin) or Dinar
(gold coin) for a certain term with an agreed increase on the amount of the
principal advanced."
41. On the basis of this practice the same author has defined the term in the following
words:

"The riba of Jahiliyya is a loan given for stipulated period with a

stipulated increase on the principal payable by the loanee."
42. The well-known Imam Fakhruddin Al-Raazi has mentioned the practice of riba in the
days of Jahiliyya as follows:

24
 "As for the riba An-Nasiah, it was a transaction well-known and
recognized in the days of Jahiliyya i.e. they used to give money with a
condition that they will charge a particular amount monthly and the
principal will remain due as it is. Then on the maturity date they
demanded the debtor to pay the principal. If he could not pay, they would
increase the term and the payable amount. So it was the riba practiced by
the people of Jahiliyya."
The same explanation is given by Aadil Al-Dimashqi in his detailed Tafseer Al-Lubaab
v.4 p.448.

The Detailed Account of Riba al-Jahiliyya

43. Mr. Riazul Hassan Gillani, the learned counsel for the Federation of Pakistan argued
before us that riba al-Jahiliyya which was prohibited by the Holy Qur'an was a particular
transaction in which no increase used to be stipulated at the time of advancing a loan;
however, if the debtor could not pay the principal amount at the time of maturity, the
creditor used to offer him two options: either to pay the principal or to increase the
amount in exchange of an additional term allowed by the creditor. The learned counsel
argued that the original loan advanced in the days of Jahiliyya would not stipulate any
additional amount in the principal, and therefore, any amount stipulated in the original
contract of loan does not fall within the definition of riba al-Qur'an. However, it may fall
in the definition of riba-al-Fadl which is a Makruh (detested, not advisable) practice.
44. The learned counsel referred to a number of traditions narrated by the exegetes of the
Holy Qur'an. For example, he cited the well-known Tafseer of Ibn Jarrir At-Tabari who
on the authority of Mujahid has explained the riba of Jahiliyya as follows:

"In the days of Jahiliyya a person used to owe a debt to his creditor then
he would say to his creditor, 'I offer you such and such amount and you
give me more time to pay.'"
45. The same explanation has been given by a number of commentators of the Holy
Qur'an. Mr. Riazul Hassan Gillani argued that there is no mention in these traditions of
any increase on the principal stipulated in the original transaction of loan. What is
mentioned here is that the increase used to be offered or claimed at the time of maturity
which shows that riba prohibited by the Holy Qur'an was restricted to claiming an

25
amount for giving an additional time to the debtor. If an increased amount is stipulated in
the initial transaction of loan, it is not covered by riba al-Qur'an.
46. This contention of the learned counsel did not appeal to us at all, for the simple
reason that a careful study of the relevant material in the original resources of Tafseer
clearly shows that the claim of an increased amount over the principal had different forms
in the days of Jahiliyya. Firstly, while advancing a loan the creditor used to claim an
increased amount over the principal and would advance loan on this clearly stipulated
condition as is mentioned by Imam Al-Jassas in his Ahkamul Qur'an already quoted
above. Secondly, the creditor used to charge a monthly return from the debtor while the
principal amount would remain intact up to the day of maturity as mentioned by Imam
Ar-Raazi and Ibn Aadil already quoted.
47. The third form is mentioned by Mujahid as quoted by the learned counsel, but the full
explanation of this transaction is given by Ibn Jarir himself on the authority of Qatadah in
the following words:

"The Riba of Jahiliyya was a transaction whereby a person used to sell a

commodity for a price payable at a future specific date, thereafter when
the date of payment came and the buyer was not able to pay, the seller
used to increase the amount due and give him more time."
48. The same explanation has been given by al-Suyuti on the authority of Faryabi in the
following words:

"They used to purchase a commodity on the basis of deferred payment,

then on the date of maturity the sellers used to increase the due amount
and increase the time of payment."
49. It is clear from these quotations that the transaction in which the creditor used to
charge an additional amount on the date of maturity was not a transaction of loan.
Initially; it used to be a transaction of sale of a commodity on deferred payment basis in
which the seller used to fix a higher price because of deferred payment, but when the
buyer would not pay at the date of maturity, the seller used to keep on increasing the
amount in exchange of additional time given to the buyer. This particular transaction is
meant by Mujahid also, that is why, he did not use the word Qarz (loan); he has rather
used the word Dain (debt) which is normally created by a transaction of sale.
50. This form of Riba has been frequently mentioned by the commentators of the Holy
Qur'an because they wanted to explain a particular sentence of the verses of Riba which
is as follows:

"The non-believers say that sale is very similar to Riba." [Al-Baqarah

2:275]
51. This saying of the non-believers clearly refers to the particular transaction of sale

26
mentioned above. Their objection was that when we increase the price of commodity in
the original transaction of sale because of its being based on deferred payment, it is
treated as a valid sale. But when we want to increase the due amount after the maturity
date, when the debtor is not able to pay, it is termed as Riba while the increase in both
cases seems to be similar. This objection of the non-believers of Makkah has been
specifically mentioned by the famous commentator Ibn Abi Hatim on the authority of
Said ibn Jubair:

"They used to say that it is all equal whether we increase the price in the
beginning of the sale, or we increase it at the time of maturity. Both are
equal. It is this objection which has been referred to in the verse by saying
'They say that the sale is very similar to Riba.'"
52. The same explanation is given in al-Bahr al-Muheet by Abu Hayyan and several other
original commentators of the Holy Qur'an.
53. It clearly shows that the practice of increase at the time of maturity relates to two
situations: firstly, a situation where the original transaction was that of sale of a
commodity as mentioned by Qatadah, Faryabi, Saeed Ibn Jubair etc, and the second
situation was where the original transaction was that of a loan whereby monthly interest
used to be charged by the creditor and the principal amount used to remain intact until the
date of maturity, and if the debtor would not pay the principal at that point of time, the
creditor used to increase the due amount on the principal in exchange of further time
given to debtor as mentioned by Imam Raazi and Ibn Aadil etc already quoted in paras 42
and 43 above.
54. It is thus established that the Riba prohibited by the Holy Qur'an was not confined to
the transaction referred to by Mr. Riazul Hassan Gillani, the learned counsel for the
Federation of Pakistan. It had different forms which all were practiced by the Arabs of
Jahiliyya. The common feature of all these transactions is that an increased amount was
charged on the principal amount of a debt. At times, this debt was created through a
transaction of sale and it was created through a loan. Similarly, the increased amount was
at times charged on monthly basis, while the principal was to be paid at a stipulated date,
and some time it was charged along with the principal. All these forms used to be called
Riba because the lexical meaning of the term is increase. That is why, the commentators
of the Holy Qur'an like Imam Abubakr al-Jassas have defined the term in the following
words:

"The Riba of Jahiliyya is a loan given for a stipulated period against

increase on the principal payable by the Loanee."
55. Now we come to the different arguments advanced before us against the prohibition
of the modern interest.
The Statement of Sayyidna Umar, Radi-Allahu anhu, About the Ambiguity in the
Concept of Riba

27
56. Mr. Abu Bakr Chundrigar, the learned counsel for Habib Bank Ltd. placed his
reliance on an article written by Mr. Justice (late) Qadeeruddin Ahmad, which appeared
in daily DAWN dated 12 August 1994. In this article the late Justice Qadeeruddin Ahmad
contended that the term Riba as used in the Holy Qur'an is an ambiguous term, correct
meaning of which was not understood even by some companions of the Holy Prophet,
Sall-Allahu alayhi wa sallam. He referred to the statement of Sayyidna Umar, Radi-
Allahu anhu, that the verses of Riba were among the "last verses of the Holy Qur'an and
the Holy Prophet, Sall-Allahu alayhi wa sallam, passed away before he could explain
them to us, therefore, avoid Riba and every thing which is doubtful." The same argument
has been adopted by a number of appellants in their memos of appeal so much so that
some of the appellants have termed the verses of Riba as Mutashabihaat (the verses
having ambiguity or confusion in their meaning). They argued that the Holy Qur'an has
asked us to follow only those verses which are clear in meaning (Muhkamaat) and not to
follow Mutashabihaat. The verses of Riba being of the second category, according to the
appellants, they are not practicable.
57. This argument is fallacious on the face of it, because in the verse of Surah al-Baqarah
Allah almighty declared war against those who do not avoid the practice of Riba. How
could one imagine that Allah Almighty, the All-Wise, the All-Merciful, can wage war
against a practice, the correct nature of which is not known to anybody.
In fact the term Mutashabihaat used in the beginning of Surah Al-i-'Imran of the Holy
Qur'an refers to two kinds of verses: firstly, they refer to some words used in the
beginning of different Surahs, the correct meaning of which is not known to any body for
sure, like, "Alif Lam Mim Ra", but the ignorance of the correct meaning of these words
does not affect the lives of Muslims because no precept of Shar'iah has been given
through these words. Secondly, the word Mutashabihaat refers to some attributes of
Almighty Allah, the exact nature of which is not conceivable by a human being. For
example, Holy Qur'an has referred to the 'hand of Allah' in certain places (like An-Nisaa
3:73, Al-Maidah 5:63, Al-Fat-h 48:10). No body knows what is the nature of the hand of
Allah, nor is it necessary for one to know, because no practical issue depends on its
knowledge, but some people used to indulge in the quest of their exact nature which was
neither their responsibility to discover nor did any practical precept of Shar'iah depend on
their understanding. Allah Almighty has forbidden those people from indulging in the
hypothetical discussion about the nature of these attributes because it had no concern
with the practical precepts of Shar'iah they were required to follow. But it never
happened that a practical rule of Shar'iah is termed as Mutashabihaat. It is not only
declared by the Holy Qur'an (in Al-Baqarah 2:233) but it is also a matter of common
sense that Allah never burdens a people with a command the obedience of which is
beyond their control/ability. If the correct meaning of Riba was not known to any body,
Almighty Allah could not have made it incumbent on the Muslims to avoid it. A plain
reading of the verses of Surah al-Baqarah reveals that Riba has been declared a very
grave sin and its gravity is emphasized in an unparalleled manner when it was said that if
the Muslims did not leave this practice, they should face a declaration of war from Allah
and His Messenger.

28
A Description of Riba al-Fadl
58. So far as the statement of Sayyidna Umar, Radi-Allahu anhu, is concerned, it will be
necessary before analyzing it to note that the Holy Qur'an had prohibited the Riba of
Jahiliyya with all their forms already mentioned above. All these forms related to the
transactions of a loan or a debt created by sale etc. But after the revelations of these
verses, the Holy Prophet, Sall-Allahu alayhi wa sallam, prohibited some other
transactions as well, which were not known previously as Riba. The Holy Prophet, Sall-
Allahu alayhi wa sallam, felt that, given the commercial atmosphere at that time, certain
barter transactions might lead the people to indulge in Riba. The Arabs used certain
commodities like wheat, barley, dates etc., as a medium of exchange to purchase other
things. The Holy Prophet, Sall-Allahu alayhi wa sallam, treating these commodities as a
medium of exchange like money, issued the following injunction:

"Gold for gold, silver for silver, wheat for wheat, barley for barley, date
for date, salt for salt, must be equal on both sides and hand to hand.
Whoever pays more or demands more (on either side) indulges in Riba."
59. It means that if wheat is exchanged for wheat, the quantity on both sides must be
equal to each other and if the quantity of any one side is more or less than the other, this
transaction is also a Riba transaction, because in the tribal system of Arab these
commodities were used as money, and the exchange of one kilogram of wheat for one
and a half (1 1/2) kilogram of another wheat would stand for the exchange of one dirham
for one and a half (1 1/2) dirham. However, this transaction was termed as riba by the
Holy Prophet, Sall-Allahu alayhi wa sallam, and this meaning was not covered by the
term 'riba al-Jahiliyya'. Therefore, it was called as 'riba al-fadl' or 'riba-al-sunnah'.
60. It is to be noted that, while prohibiting the riba al-fadl, the Holy Prophet, Sall-Allahu
alayhi wa sallam, has identified only six commodities and it was not clearly mentioned in
the above hadith whether this rule is limited to these six commodities or it is applicable to
some other commodities as well, and in the latter case what are those commodities? This
question raised controversy among the Muslim jurists. Some earlier jurists, like Qatadah
and Tawoos, restricted this rule to these six commodities only, while the other jurists
were of the opinion that the rule will be extended to other commodities of the same
nature. Then there was a difference of opinion about the nature of these commodities that
might be taken as a common feature found in all the six commodities and a criterion for
identifying the commodities which are subject to the same rule. Imam Abu Hanifa and
Imam Ahmad are of the opinion that the common feature of these six commodities is that
they can either be weighed or measured, therefore, any commodity which is sold by
weighing or measuring falls within this category and is subject to the same rule, if it is
bartered with a similar commodity. Imam al-Shafii is of the view that the common
feature of these six commodities is that they are either eatables or they are used as a
universal legal tender. Wheat, barley, date, salt represent eatables while gold and silver
represent universal legal tenders. Therefore, according to Imam al-Shafii all eatables and
universal legal tenders are subject to the rule mentioned in the hadith. Imam Malik is of
the opinion that the common feature among these six commodities is that they are either

29
food items or they can be stored. Therefore he holds that every thing that is a food item or
can be stored is included in the same category, hence, subject to the same rule.
61. This difference of opinion among the Muslim jurists was based on the fact that after
specifying the six commodities the Holy Prophet, Sall-Allahu alayhi wa sallam, did not
expressly mention whether or not other commodities will assume the same status.

The Correct Meaning of Sayyidna Umar's Statement

62. It is in this background that Sayyidna Umar, Radi-Allahu anhu, has stated that the
Holy Prophet, Sall-Allahu alayhi wa sallam, passed away before giving any specific
direction with regard to this difference of opinion. A deeper study of the statement of
Sayyidna Umar, Radi-Allahu anhu, reveals that he was doubtful only about the Riba al-
fadl mentioned in the hadith cited above, and not about the original Riba which was
prohibited by the Holy Qur'an and was practiced by the Arabs of Jahiliyya in their
transactions of loan and non-barter sales. This is evident from the most authentic version
of the statement of Sayyidna Umar, Radi-Allahu anhu, reported in the Sahih of al-
Bukhari and Muslim. The words reported by Bukhari are as follows:

"There are three things about which I wished that the Holy Prophet, Sall-
Allahu alayhi wa sallam, did not leave us before explaining them to us in
detail: the inheritance of grand father and the inheritance of Kalalah (a
person who has left neither a father nor a son) and some issues relating to
Riba."
63. Moreover, at another occasion Sayyidna Umar, Radi-Allahu anhu, has clarified his
position in the following words:

"You think that we do not know about any issue from the issues of Riba -
and no doubt I would love to know all these issues' more than I would like
to own a country like Egypt with all its habitations - but there are many
issues (about Riba) which cannot be unknown to any one e.g. purchasing
gold for silver on deferred payment basis."
64. These narrations of the statement of Sayyidna Umar, Radi-Allahu anhu, clearly reveal
two points: firstly, that all his concern in the issues of Riba related to Riba al-Fadl and
not to Riba al-Nasiah which was prohibited by the Holy Qur'an, and secondly, that even
in the issue of Riba al-Fadl he did not feel difficulty in many transactions which were
clearly prohibited, however, he was doubtful only with regard to some transactions which
were not expressly mentioned in the relevant Hadith or in any other saying of the Holy

30
Prophet, Sall-Allahu alayhi wa sallam.
65. An objection may be raised on the above explanation. According to a narration
reported by Ibn Majah, Sayyidna Umar, Radi-Allahu anhu, had declared that the verse of
Riba was the last revealed verse of the Holy Qur'an, therefore, the Holy Prophet, Sall-
Allahu alayhi wa sallam, passed away before explaining it in full terms.' This narration
shows that the doubts of Sayyidna Umar, Radi-Allahu anhu, related to the same Riba as
was prohibited by the Holy Qur'an and not to Riba al-Fadl. But after studying different
sources narrating this statement of Sayyidna Umar, Radi-Allahu anhu, it transpires that
the narration of Ibn Majah is not as authentic as that of Bukhari and Muslim. One of the
narrators in the report of Ibn Majah is Saeed Ibn Abi Arubah who has been held by the
experts of Hadith as a person who used to confuse one narration with the other. We have
already quoted the exact words reported by Bukhari and Muslim with very authentic
chain of narrators. None of them has attributed to Sayyidna Umar, Radi-Allahu anhu, that
the verse of Riba was the last verse of the Holy Qur'an. It seems that a narrator like Saeed
Ibn Abi Arubah has confused the exact words of Sayyidna Umar, Radi-Allahu anhu, with
the words of Sayyidna Ibn Abbas, Radi-Allahu anhu, already discussed or with his own
view that the verse of Riba was the last verse of the Holy Qur'an. We have already
explained in detail the real facts in this respect and that it was not correct to believe that
Riba was prohibited in the last days of the Holy Prophet, Sall-Allahu alayhi wa sallam, or
that the verses of Riba were the last revealed verses of the Holy Qur'an. Therefore, the
version given by Ibn Majah cannot be relied upon while correctly assessing the statement
of Sayyidna Umar, Radi-Allahu anhu. It is consequently established that whatever doubts
Sayyidna Umar, Radi-Allahu anhu, had in his mind about Riba were relevant to Riba al-
Fadl only. So far as Riba al-Qur'an or Riba al-Nasiah is concerned, he had not the
slightest doubt about its nature and its prohibition.

Productive or Consumption Loans

66. Another argument advanced by some appellants was that the Holy Qur'an had
prohibited to claim any increase over and above the principal in the case of consumption
loans only, where the borrowers used to be poor person's borrowing money to meet their
day to day needs of food and clothes etc. Since no productive loans were in vogue in the
days of Holy Prophet, Sall-Allahu alayhi wa sallam, it was not contemplated by the verse
of Riba to prohibit a charge on the commercial and productive loans. Otherwise also, they
argued, it is injustice to claim any additional amount on the principal from a poor person,
but it is not so in the case of a rich man who borrows money to develop his own
commercial enterprise and earn huge profits through it. Therefore, it is only the loans of
the first kind i.e. consumption loans on which any excess is termed as Riba and not an
increased amount charged on the commercial loans.
67. We have paid due consideration to this argument but it could not stand the academic
scrutiny for three reasons:

(i) Validity of a Transaction is not Based on the Financial Status of a Party

68. Firstly, the validity of a financial or commercial transaction does never depend on the
financial position of the parties. It rather depends on the intrinsic nature of the transaction
itself. If a transaction is valid by its nature, it is valid irrespective of whether the parties
are rich or poor. Sale, for example, is a valid transaction whereby a lawful profit is

31
generated. It is allowed regardless of whether the purchaser is rich or poor. Lease is a
lawful transaction and it is permissible even though the lessee is a poor person. The most
one can say is that a poor purchaser or a poor lessee deserves concession on humanitarian
grounds, but one cannot say that charging any amount of profit from him is totally haram
or prohibited. If a poor person wants to purchase bread from a baker, one can say that the
baker should not charge a high profit from him, but no one can say that the baker is
obligated to sell the bread to him at his cost and any profit charged by him above the cost
is totally unlawful for which he deserves hell. If a poor person hires a taxi, one can advise
the owner of the taxi to give some concession to him on the basis of his poverty, but no
one can reasonably assert that the owner of the taxi must not charge any fare from him or
must not charge a fare higher than his actual expense, otherwise his income will be held
as haram and analogous to waging war against Allah and His Messenger. The baker has
opened his shop to earn a lawful profit through the transaction of sale which is
intrinsically a valid transaction, and he deserves a reasonable profit for his investment
and labor, even though the purchaser is poor. If he is obligated to sell his breads to all the
poor persons at his cost price, he can neither run his shop nor can earn livelihood for his
children. Similarly, the one who runs a taxi for rendering transport services to the
passengers is allowed to charge a reasonable fare from those benefiting from his service.
If he is required to render this service to all poor persons free of charge, he cannot run the
taxi. Nobody has, therefore, ever claimed that charging any profit or a fee or a fare from a
poor person is totally haram. The reason is that profit, fee and fare, being lawful charges
deserved by valid transactions, may be charged from the persons benefiting from the
commodities sold or services rendered, even though the benefiting persons are poor.
69. On the other hand, the prohibited transactions are invalidated on the basis of their
intrinsic nature and not on the basis of the financial position of the parties. Gambling is
prohibited for both rich and poor persons. Bribery is unlawful regardless of whether the
bribe is charged from the rich or from the poor. It is, therefore, evident that it is not the
richness or poverty of the parties that renders a transaction valid or invalid. It is the
intrinsic nature of the transaction that really determines its validity or otherwise.
70. The case of charging interest from a debtor is in no way different. If it is a valid
charge according to its intrinsic nature, it should be allowed, even though the debtor is
poor, but if it is an invalid charge by itself, it should be unlawful irrespective of the
financial position of the parties. There is no justification for distinguishing the case of
interest from that of a sale in this respect by restricting the former's validity to the rich
borrowers only while charging of profit in a sale is allowed from both rich and poor
persons. In fact, the notion that interest is prohibited only where the borrower is poor is
totally against the well-established principles of business and trade where the validity of
transactions is judged on the basis of their own strength and not on the identity of the
parties involved.
71. Moreover, 'poverty' is a relative term which has different degrees. Once it is accepted
that interest cannot be charged from the poor, while it is quite lawful to be charged from
the rich, who will have the authority to determine the exact degree of poverty required for
exempting a person from the charge of interest? If the distinction between lawful and
unlawful interest is drawn on the basis of the purpose of the loan, and the loans taken for
consumption are exempted from the charge of interest, as urged by some appellants, the
consumption itself may be of different kinds which range from food items to luxurious

32
objects. Even if the 'consumption' is restricted to the requirements of one's life, they too
vary from person to person. One may argue that private transport has become one of the
necessities of life and therefore he is entitled to take an interest-free loan for purchasing a
car. House is one of the fundamental necessities of one's life and no interest can be
charged on millions of rupees borrowed for the purpose of constructing or purchasing a
house, because all these borrowings fall within the category of 'consumption loans'. On
the other hand, if an unemployed person borrows a few hundred rupees to start hawking
on the streets, it will be quite lawful to charge interest from him, because his loan does
not fall within the definition of a 'consumption loan'.
72. It is thus clear that the permissibility of interest can neither be based on the financial
position of the debtor, nor on the purpose for which money is borrowed, and therefore the
distinction between consumption loans and productive loans in this respect is contrary to
the well-established principles.

(ii) The Nature of Qur'anic Prohibitions

73. The. second reason for which this argument is not tenable, is that the verses which
prohibit riba do not at all differentiate between a consumption or a commercial loan, nor
does this difference find any mention whatsoever in the vast literature of the Sunnah
dealing with riba. Even if it is presumed for the sake of argument that commercial loans
were not in vogue in the days of the Holy Prophet, Sall-Allahu alayhi wa sallam, it does
not justify the insertion of a new condition in the concept of riba which, as established
earlier, was quite clear in the minds of the addressees of the Holy Qur'an. The Holy
Qur'an has prohibited riba in general terms which includes all the forms of riba whether
or not prevalent at the time of its revelation. When the Holy Qur'an prohibits a
transaction, it is not a particular form of the transaction that is meant by the prohibition. It
is the basic concept of the transaction which is hit by the injunction. When liquor was
prohibited, it was not only the particular forms of liquor available in those days which
were forbidden, it was the substance of liquor which was banned, and nobody can
reasonably claim that the new forms of liquor which were not available in the days of the
Holy Prophet, Sall-Allahu alayhi wa sallam, are not hit by the prohibition. When qimar
(gambling) was declared as haram the purpose was not to restrict the prohibition only to
those forms of gambling which were in vogue at that time. The prohibition, in fact,
encompassed all its present and future forms, and no one can sensibly argue that the
modern forms of gambling are not covered by the prohibition. We have already discussed
the meaning of the term riba as understood by the Arabs and as interpreted by the Holy
Prophet, Sall-Allahu alayhi wa sallam, and his noble companions, and that it covered any
stipulated additional amount over the principal in a transaction of loan or debt. This
concept had many forms in the days of the Holy Prophet, Sall-Allahu alayhi wa sallam,
may have taken other forms in the later ages and still may take some other forms in
future, but as long as the said basic feature of the transaction remains intact, it will
certainly invoke the prohibition.

Banking and Productive Loans in the Age of Antiquity

74. Thirdly, it is not correct to say that commercial or productive loans were not in vogue
when riba was prohibited. More than enough material has now come on the record to
prove that commercial and productive loans were not foreign to the Arabs, and that loans

33
were advanced for productive purposes both before and after the advent of Islam.
75. In fact the academic and historical research has discovered the fallacy of the
impression that mercantile loans and banking transactions are the invention of the 17th
century CE. Modern discoveries have shown that the history of banking transactions
refers back to a period not less than two thousand years before Christ. The Encyclopaedia
Britannica, while discussing the history of banks, has detailed the early traces of the
banking transactions. The relevant article begins with the following remark:
"Pastoral nations such as Hebrews, while they maintained money-lenders,
had no system of banks that would be considered adequate from the
modern point of view. But as early as 2000 BC, the Babylonians had
developed such a system. It was not the result of private initiate, as that
time, but an incidental service performed by the organized and wealthy
institution of the cult. The temples of Babylon, like those of Egypt, were
also the banks. "The shekels of silver" runs a Babylonian document, "have
been borrowed by Mas-Schamach, the son of Adadrimeni, from the Sun-
priestess Amat-Schamach, daughter of Warad-Enlil. He will pay the Sun-
God's interest. At the time of the harvest he will pay back the sum and the
interest upon it." It is evident enough that the priestess Amat-Schamach
was merely the accredited agent of the institution . No doubt the clay
tablet with the inscription corresponds to what we call negotiable
commercial paper. Another document of the same period was certainly
such. It runs: "Warad-Ilisch, the son of Taribum, has received from the
Sun-Priestess Iltani, daughter of Ibbatum, one shekel silver by the sun-
God's balance. This sum is to be used to buy sesame. At the time of the
sesame-harvest, he will repay in sesame, at the current price, to the bearer
of this document."
76. The article has then detailed how the banking operations developed from religious
institutions to private business institutions, until in 575 BC there was a banking
institution in Babylon, the Igibi bank of Babylon. The records of this bank show that it
acted as buying agent for clients; loaned on crops, attaching them in advance to ensure
reimbursement; loaned on signatures and on objects deposited and received deposits on
interest. The article has further detailed that similar banking institutions existed also in
Greece, Rome, Egypt, etc. centuries before Christ and they deposited money, lent it on
interest and extensively used letters of credit, financial papers and traded in them.
77. Will Durant, the famous historian, has given a detailed account of the banking
transactions prevalent in Greece in the fifth century before Christ. He has mentioned that
despite interest being denounced even by the philosophers, there were banks in Greece:
"Some deposit their money in temple treasuries. The temples serve as
banks, and lend to individuals and states at a moderate interest; the temple
of Apollo at Delphi is in some measure an international bank for all
Greece. There are no private loans to governments, but occasionally one
state lends to another. Meanwhile the money-changer at his table (trapeza)
begins in the fifth century to receive money on deposit, and to lend it to
merchants at interest rates that vary from 12 to 30 percent according to the
risk; in this way he becomes a banker, though to the end of ancient Greece
he keeps his early name of trapezite, the man at the table. He takes his

34
 methods from the near East, improves them, and passes them on to Rome,
which hands them down to modern Europe. Soon after the Persian War,
Themistocles deposits seventy talents ($420,000) with the Corinthian
banker Philostephanus, very much as political adventurers feather foreign
nests for themselves today; this is the earliest known allusion to secular-
nontemple-banking. Towards the end of the century Antisthenes and
Archestrtus establish what will become, under Pasion, the most famous of
all private Greek banks. Through such trapezitai money circulates more
freely and rapidly, and so does more work, than before, and the facilities
that they offer stimulate creatively the expansion of Athenian trade."
78. Even in the days closer to the advent of Islam in Arabia, all kinds of commercial,
industrial and agricultural loans advanced on the basis of interest were prevalent in the
Byzantine Empire ruling in Syria, to the extent that Justinian, the Byzantine emperor
(527-565 A.D) had to promulgate a law determining the rates of interest which could be
charged from different types of borrowers. Gibbon has detailed the contents of the Code
of Justinian and that it allowed the rate of 4% charged as interest from illustrious people,
6% charged from general people as ordinary rate of interest, 8% from the manufacturers
and merchants and 12% from nautical insurers. The exact words of Gibbon are as
follows:
"Persons of illustrious rank were confined to the moderate profit of Four
Per Cent; six was pronounced to be the ordinary and legal standard of
interest; eight was allowed for the convenience of manufacturers and
merchants; twelve was granted to nautical insurers."
79. The underlined part of the above passage shows that the practice of commercial loans
was so wide-spread in the Roman Empire that a separate law was enforced to fix their
rate of interest. This law of Justinian was promulgated in Byzantine Empire shortly
before the birth of the Holy Prophet, Sall-Allahu alayhi wa sallam, in Arabia (Justinian
died in 565 CE while the Holy Prophet, Sall-Allahu alayhi wa sallam, was born in 570
CE) and obviously the law remained in force for quite a long time after its promulgation.
On the other hand the Arabs, especially of Makkah, had constant business relations with
Syria, one of the most civilized provinces of the Byzantine Empire. As we shall see later
in detail, the Arabs trade caravans used to export goods to and import other goods from
Syria. Their economic and financial relations with the Byzantine Empire were so
prominent that the currency used throughout the Arabian peninsula was the dirhams (of
silver) and dinars (of gold) coined by the Byzantine Empire, so much so that the poets
have referred to the Dinars as Ceazarians. Kuthair 'Uzzah, of the famous Arab poets says:

80. Ibn-al-Anbari quotes another poet saying:

81. Rather, some contemporary writers have claimed that the nomenclature of the Arabic
coins (dirham, diner and fals) is originally derived from the Greece or latin words which
are very similar to these names. These Byzantine coins remained in use throughout the
Muslim world till the year 76 A.H., when Abdulmalik ibn Marwan started coining his

35
own dinars.
82. Keeping in view such close financial relations of the Arabs with the Roman Empire,
how can it be imagined that the Arabs were totally unaware of the credit transactions
flourishing in the Roman Empire? As we shall see later, the business-relations of the
Arabs were not restricted to Syria. They extended to Iraq, Egypt, and Ethiopia as well.
They were fully aware of the business style of these countries, and their awareness about
the interest based transactions of these countries is reflected in an advice given by
Abdullah b. Salaam, Radi-Allahu anhu, (a native of Madinah) to Abu Burdah (who had
settled in Iraq and came to visit Madinah). Abdullah b. Salaam, Radi-Allahu anhu,
warned him that he was living in a country where riba had wide currency, and therefore,
he should be very careful while dealing with other people lest he should indulge in riba
unconsciously. The same advice was given by Sayyidna Ubayy ibn Kab, Radi-Allahu
anhu, to his pupil Zirr b. Hubaish.

Commercial Interest in Arabia

83. Coming to the case of Arabian peninsula itself, no one can deny the fact that trade
was the most outstanding economic activity of the Arabs. Makkah, in particular,
consisted of barren lands and hills with very little amount of water and therefore was
totally unfit for cultivation. That is why commerce and trade was the basic characteristic
of the economic life of the Arabs of Makkah. One of the most outstanding features of the
Arabian trade was that their commercial activities were not restricted to their own land.
Their main business was to export their own goods to all the surrounding countries and
import their goods to their own cities. For this purpose their commercial caravans used to
travel to Syria, Iraq, Egypt, Ethiopia etc. The history of these trade-caravans refers back
to a period as early as that of the holy Prophet Yaqoob, alayhi salam, (Jacob or Israel). It
is mentioned by the Holy Qur'an that the brothers of Sayyidna Yousuf, alayhi salam,
(Joseph) had thrown him in a pit from where a passing caravan picked up and sold him in
Egypt. According to historical evidence, this caravan was an Arab caravan consisting of
the children of Ismail, alayhi salam, who had embarked on a business tour to export
goods to Egypt. This fact finds mention in the Old Testament of the Bible itself which
says:
"And they sat down to eat bread: and they lifted up their eyes and looked,
and, behold, a company of Ishmaelites came from Gilad with their camels
bearing spicery and balm and myrrh, going to carry it down to Egypt."
[Genesis 37:25]
84. This Arab caravan was going to export spices, balms, and perfumes in such an early
period to such a distant country, Egypt, that was thousands of miles away from the center
of Arabia. It may show the extent to which the Arabs had deployed their courageous
entrepreneurship right from the beginning of their history.
85. Naturally, the commercial activities of the Arabs kept on increasing in the later days,
so much so that they were identified as a trading nation. How far their international trade
had flourished before the advent of Islam has been detailed by the historians, and it is
neither possible nor necessary to give all these details here, but the fact that the Arabs
were trade-oriented people can hardly be questioned by a person who has studied their
history. The importance of their trade caravans can be assessed by the fact that the Holy
Qur'an has revealed a full Surah (Al-Qureish) to denote that their business towards

36
Yemen in winter and towards Syria in summer were a blessing from Allah on account of
their services to Kabah. The Holy Qur'an has specifically mentioned the term ilaaf which
refers to the commercial treaties the Arabs of Quraish had with different nations and
tribes. The size of these caravans may be imagined from the fact that the caravan led by
Abu Sufyan at the time of the battle of Badr consisted of one thousand camels and had
returned with 100% profit (one dinar for every one dinar).
86. Obviously, the caravan of this huge size could not be owned by any one individual. It
was a collective enterprise of the whole tribe and was funded by the contributions of all
the members of the tribe like a joint stock company. The historians have noted that:

"There remained no male or female in the tribe of Quraish who had one
misqaal of gold and had not contributed to the caravan."
87. It was not only the caravan of Abu Sufyan that was funded in this manner. Almost all
the big caravans used to be organized on the same pattern.
88. Keeping this commercial atmosphere in view, one can hardly imagine that the Arabs
were not familiar with commercial loans, or that their loans were restricted to
consumption purposes. But apart from hypothesis, there are concrete evidences that they
used to borrow money for their commercial and productive needs. Some of these
evidences are summarized below.
(a) Dr. Jawed Ali, whose extensive research about the Arabs of jahiliyyah is appreciated
throughout the academic world, has analyzed the funding sources of these caravans and
has remarked as under:

"What the historians have narrated about the caravans of Makkah reveals
that the capital of a caravan never used to be the capital of one individual
or a particular family; it rather belonged to the traders of different families
and to those individuals who themselves had money or had borrowed it
from others and had contributed it to the capital of the caravan, with a
hope to earn huge profit."
The underlined sentence shows that these caravans used to be funded, inter alia, by the
commercial loans.
(b) All the books of tafseer have mentioned the background of the verses of Surah al-
Baqarah dealing with riba. Almost all of them have reported that different tribes of
Arabia used to take interest-based loans from each other. For example, Ibn Jarir al-Tabari
says:

37
 "The tribe of Banu Amr used to charge interest from the tribe of Banu al-
Mughirah and Banu al-Mughirah used to pay them interest."
These loans were not taken by one individual from another. Instead, the tribe as a
collective entity used to borrow money from another tribe. We have already shown that
the tribes of Arabia used to work as a joint stock company for the purpose of funding
their trade-caravans and in order to undertake their joint enterprise. Therefore, the loans
taken by one tribe from the other were not for the purpose of consumption only; they
were certainly commercial 1oans meant to finance their commercial ventures.
(c) While explaining the verse of Surah Al-Rum (30:39), already quoted in Para No. 17
of this judgment, Ibn Jarir al-Tabari has reported the view of some earlier commentators
of the Holy Qur'an that this verse refers to the practice of some people in jahilliyah who
would finance some others to increase the wealth of the recipients. Ibn Jarir has
supported this view by the following statement of Sayyidna Ibn Abbas, Radi-Allahu
anhu.

"Have you not seen a person saying to another, 'I shall certainly finance
you' then he gives him? So, this does not increase with Allah, because he
gives him not to please Allah, but to increase his wealth."
He has also quoted the following statement of Ibrahim al-Nakhai in the same context:

"It was in the days of jahiliyyah that one used to give money to one of his
relatives to increase his wealth."
Obviously, financing for the purpose of increasing wealth of the recipient means that the
recipient would invest this money to earn profit and thereby increase his wealth. These
statements of Ibn Abbas, Radi-Allahu anhu, and Ibrahim al-Nakhai clearly show that the
practice of financing for productive purposes was so prevalent in the Arab Society that,
according to these commentators, the verse of Surah al-Rum was revealed in that context.
(d) The concept of commercial loan finds mention in a hadith of the Holy Prophet, Sall-
Allahu alayhi wa sallam, himself, which is reported by Imam Ahmad, Al-Bazzar and Al-
Tabarani from Abdurrahman ibn Abi Bakr, Radi-Allahu anhu. According to him, the
Holy Prophet, Sall-Allahu alayhi wa sallam, has said:
"Allah Almighty will call a debtor on the Day of Judgment. He will stand
before Allah and will be asked O son of Adam, why did you take this loan
and why did you violate the rights of the people? He will say, My Lord,
you know that I have taken this loan, but neither used it in a eating or
drinking nor in wearing clothes nor in doing something, instead, I was
afflicted either by fire or by theft or by a business loss. Allah will say, My
slave has told the truth. I am the best One who will pay today on your

38
 behalf."
The underlined words contemplate that this person had borrowed money for commercial
purpose whereafter he suffered a business loss. It shows that the concept of the loans
taken for commercial purposes was quite clear even in the mind of the Holy Prophet,
Sall-Allahu alayhi wa sallam.
(e) The Holy Prophet, Sall-Allahu alayhi wa sallam, has, in another authentic hadith
reported by Imam Bukhari, narrated the story of an Israelite person who had borrowed
one thousand dinars from another person and then embarked on a sea voyage. Some other
reports have expressly mentioned that this borrowing was for commercial purpose.
Moreover, such a huge amount cannot be borrowed for normal consumption needs, and
the hadith mentions that the borrower set out on his sea voyage and after the date of
maturity he earned so much that he sent one thousand dinars to his creditor, and offered
to pay him the same amount once more under the impression that the first payment did
not reach him, but the creditor admitted that he had received the amount and therefore he
refused the debtor's offer to pay him once more.
There is another example of where the Holy Prophet, Sall-Allahu alayhi wa sallam,
himself has referred to a commercial loan.
(f) Apart from the practice of the trade-caravans detailed above, there are many examples
to show that the commercial loans used to be given and taken on individual level as well.
Some of the examples are given below:
(i) Abu Lahab, the uncle off the Holy Prophet, Sall-Allahu alayhi wa
sallam, was one of the most inimical persons towards him, but he did not
participate personally in the battle of Badr. The reason was that he had
advanced a loan of four thousand dirhams on interest to one Asi bin
Hisham and when he could not repay it, he hired his debtor against his
loan to replace him in the battle. Obviously, this amount of four thousand
dirhams was too big (in those days) to be borrowed by a starving person to
satisfy his hunger. It was certainly borrowed for the purpose of trade
which could not bring fruit and the debtor stood bankrupt.
(ii) It is reported by several books of hadith and history that Sayyidna
Zubair Ibn Awwam, Radi-Allahu anhu, was one of the richest companions
of the Holy Prophet, Sall-Allahu alayhi wa sallam. On account of his
credibility people wanted to deposit their money with him in trust, but he
refused to receive any deposit from any one unless he gives it to him as a
loan. It was beneficial for the depositor, because after treating it as a loan,
Sayyidna Zubair, Radi-Allahu anhu, was liable to repay it in any case,
while in the case of a simple deposit in trust, he would not be liable to
repay if the amount is lost by theft, fire etc. Once the people deposited
money with Sayyidna Zubair, Radi-Allahu anhu, as a loan, he invested the
money in trade. The manner in which Sayyidna Zubair, Radi-Allahu anhu,
used to receive deposits and invest them in trade is very similar to a
private bank. It is reported by Imam Bukhari that his liabilities toward his
depositors were calculated, at the time of his death, to be two million and
two hundred thousand, and all this amount was invested in commercial
projects.
(iii) Ibn Saad has reported Sayyidna Umar, Radi-Allahu anhu, wanted to

39
send a trade caravan to Sriya, and for that purpose he borrowed four
thousand dirhams from Sayyidna Abdurrahman ibn Awaf, Radi-Allahu
anhu.
(iv) Ibn Jarrir has reported that Hind, daughter of Utbah and wife of Abu
Sufyan borrowed four thousand dirhams from Sayyidna Umar, Radi-
Allahu anhu, for the purpose of her trade. She invested this money in
purchasing goods and selling them in the market of the tribe of Kalb.
(v) Al-Baihaqi has reported that Sayyidna Miqdad ibn Aswad, Radi-
Allahu anhu, borrowed seven thousand dirhams from Sayyidna Usman,
Radi-Allahu anhu. Obviously, this amount was not borrowed by a poor
person for his consumption needs, because Sayyidna Miqdad, Radi-Allahu
anhu, the borrower, was of the rich Sahabah who was the only one riding a
horse in the battle of Badr and whose agricultural produce was purchased
by Sayyidna Muawiyah, Radi-Allahu anhu, for 100,000/- dirhams.
(vi) When Sayyidna Umar, Radi-Allahu anhu, received the fatal blow
from a Christian, he called his son and directed him to calculate the
amounts he owed to his creditors. His son calculated the amount and
found that it was 80,000 dirhams. Some people advised Sayyidna Umar,
Radi-Allahu anhu, to borrow this money from Baitulmal, so that he may
relieve himself from his liability towards the people and that the debt of
the Baitulmal might be settled after selling his assets, but Sayyidna Umar,
Radi-Allahu anhu, rejected the suggestion and directed his sons to pay the
amount from his own assets. Obviously, this amount of 80,000 dirhams
could not have been borrowed for personal consumption.
(vii) Imam Maalik has reported in his Al-Muwatta that Abdullah and
Ubaidullah, the two sons of Sayyidna Umar, Radi-Allahu anhu, went to
Iraq for the purpose of Jihad. While coming back they met Abu Musa Al-
Ashari, Radi-Allahu anhu, the governor of the City of Basra. He told them
he wanted to send some money of the public exchequer to Sayyidna Umar,
Radi-Allahu anhu, in Madina. Instead of giving them that money in trust,
he suggested that he give it to them as a loan so that it may remain in the
risk of Abdullah and Ubaidullah and may reach safely to Sayyidna Umar,
Radi-Allahu anhu, and it was beneficial for Abdullah and Ubaidullah as
well because after taking the amount as loan, they could purchase some
goods from Iraq and sell them in Madina and after settling the principal
amount to Sayyidna Umar, Radi-Allahu anhu, they could earn some profit.
They accepted the suggestion and acted accordingly. When after reaching
Madina they paid the principal amount to Sayyidna Umar, Radi-Allahu
anhu, he asked them whether Abu Musa, Radi-Allahu anhu, had given
such a loan to all the members of the army as well. They replied in
negative. Sayyidna Umar, Radi-Allahu anhu, said, "He has given you this
loan only because of your relationship with me, therefore, you will have to
return not only the principal but also the profit earned through it."
Ubaidullah Ibn Umar objected that this decision was not just, because if
the goods purchased by them were destroyed in the way, they would have
born the risk and were liable to pay the principal amount in any case,

40
 therefore, they deserve the profit they earned. Still Sayyidna Umar, Radi-
Allahu anhu, insisted to return the profit to Baitulmal. One of the persons
present at that time suggested to Sayyidna Umar, Radi-Allahu anhu, that
instead of claiming all the profit from them, he might convert this
transaction into Mudarabah through which half of the profit would be
deserved by Abdullah and Ubaidullah and the remaining half would go to
Baitulmaal. Sayyidna Umar, Radi-Allahu anhu, accepted this proposal and
acted accordingly. Obviously the loan advanced to Abdullah and
Obaidullah in this case was a commercial loan contemplated from the very
beginning to be invested in trade.
89. The above material is more than enough to prove that the concept of commercial
loans was not alien to the Holy Prophet, Sall-Allahu alayhi wa sallam, or his companions
when riba was prohibited. Therefore, it is not correct to say that the prohibition of riba
was restricted to the consumption loans only and it did not refer to the commercial loans.

Excessive Rates of Interest

90. Another argument advanced on behalf of some appellants was that the prohibition of
riba is applicable only to those interest transactions where the rate of interest is exorbitant
or excessive. This argument is sought to be supported by the verse of Surah Al-i-'Imran:

"O ye who believe! devour not Usury, doubled and multiplied; but fear
Allah; that ye may (really) prosper." [Al-i-'Imran 3:130]
91. It is argued that this verse of the Holy Qur'an is the first verse that came with a clear
prohibition of riba, but it has qualified the prohibition by the words "doubled and
multiplied" to denote that the practice of riba is forbidden only when the rate is so
excessive that it makes the payable amount twice that of the principal. The logical result
of this expression would be that if the rate of interest is not so high, the prohibition is not
applicable. The interest charged in the present banking system, it is argued, is not
normally so high as to make the payable amount double the principal, and, therefore, the
banking interest is not covered by the prohibition.
92. This argument overlooks the fact that the different verses of the Holy Qur'an relating
to the same subject must be studied in juxtaposition with each other. No verse can be
interpreted in isolation from the other relevant material available in other parts of the
Holy Qur'an. As explained at the very beginning, the Holy Qur'an has dealt with the
subject of riba in four different chapters. Obviously, no verse can contradict another
verse on the same subject. The most detailed treatment of the subject of riba is found in
Surah Al-Baqarah, the relevant verses of which have already been quoted and translated
in paragraph 15 of this judgment. These verses include the following command:

41
 "O those who believe fear Allah and give up whatever remains of riba, if
you are believers." [Al-Baqarah 2:278]
93. The words "whatever remains of riba" in this verse indicate that every amount over
and above the principal has to be given up. This point is further clarified in express terms
by the following sentence:

"And if you repent (from the practice of riba) then you are entitled to get
back your principal."
94. These words do not leave any ambiguity in the fact that repentance from the practice
of riba is not possible unless any amount exceeding the principal is given up and that a
lender is entitled only to the principal he has actually advanced. A combined study of the
verses of Surah Al-i-'Imran and Surah Al-Baqarah leaves no doubt that the words
"doubled and multiplied" occurring in Surah Al-i-'Imran are not of restrictive nature, and
that "doubled and multiplied" is not a necessary condition for the prohibition of riba.
These words have rather been used to refer to the worst kind of practice of riba rampant
at that time.
95. In order to fully understand the point, we must refer to one of the basic principles of
the interpretation of the Holy Qur'an. The Holy Book is not originally a statute book
meant to be used as a legal text. It is a book of guidance which, along with certain laws or
commandments, embodies many expressions having persuasive value. Unlike the text of
a statute book, the Holy Qur'an contains some words or expressions used either for
emphasis or for explaining the evil results of a particular act. They are not meant to be
taken as a restrictive qualification for the command or the prohibition preceding them. A
self-evident example of this style of the Holy Qur'an is the verse which says:

"Do not sell my verses for a little price." [Al-Baqarah 2:41]

96. Nobody can take this verse to mean that selling the verses of the Holy Qur'an is
prohibited only because the price claimed is very low and that if the verses are sold for a
higher price, the practice can be held as permissible. Every person of common sense can
easily understand that the words "for a little price" used in this verse are not of restrictive
nature. They are rather meant to indicate the evil practice of some people who used to
commit the grave sin of selling the verses of the Holy Qur'an and still did not gain much
in financial terms. It never means that the blame is directed towards the "little price" they
gain; rather the blame is directed to the selling of verses itself.
97. Similarly, at another place the Holy Qur'an says:

"And do not force your slave girls to prostitution if they want to remain

42
 chaste." [An-Nur 24:33]
98. Obviously it does not mean that if the girls do not want to remain chaste, one can
force them to prostitution. What the verse means is that although the prostitution in itself
is a grave sin, yet it becomes all the more evil if a girl is forced to indulge in this
profession while she intends to remain chaste. The words "if they want to remain chaste"
are not of restrictive nature meant to qualify the prohibition with their desire to remain
chaste. These words have been added only to indicate the increased severity of the crime.
It is in the same style that the words "doubled or redoubled" have been used with riba in
the verse of Surah Al-i-'Imran. They are not intended to qualify the prohibition of riba
with doubling or redoubling. They are only meant to emphasize the added severity of the
sin if the interest charged is so exorbitant or excessive. This intention of the verse of the
Holy Qur'an is quite evident in the light of the verse of Surah Al-Baqarah already quoted
above.
99. Secondly, the interpretation of the Holy Qur'an should always be based on the
explanation given by or inferred from the Ahadith of the Holy Prophet, Sall-Allahu alayhi
wa sallam, and his noble companions who were the direct recipients of the revelation and
were fully familiar with the context of the verse and the environment in which it was
revealed. From this aspect as well, it is certain that the prohibition of riba was never
meant to be restricted to a particular rate of interest. The prohibition was meant to cover
every amount charged in excess of the principal, however small it may be. The following
Ahadith are sufficient to prove this point:
(i) We have already mentioned that the Holy Prophet, Sall-Allahu alayhi wa sallam, made
a general declaration of the prohibition of riba at the time of his last sermon on the
occasion of his last Hajj. The words used by him in that sermon, as reported by Ibn Abi
Hatim, were as follows:

"Listen, every amount of interest that was due in Jahiliyya is now declared
void for you in its entirety. You are entitled only to your principal
whereby neither you wrong nor be wronged. And the first liability of
interest declared to be void is the interest of Abbas ibn Abd-ul-Muttalib
which is hereby declared void in its entirety."
Here the Holy Prophet, Sall-Allahu alayhi wa sallam, declared the total amount
exceeding the principal as nullified in its entirety. He has left no ambiguity in the fact that
the creditors will be entitled to get back only the principal and will not be able to charge
even a penny over and above the principal amount.
(ii) It is reported by Hammad b, Salamah in his Jame from Sayyidna Abu Hurairah, Radi-
Allahu anhu, that the Holy Prophet, Sall-Allahu alayhi wa sallam, has said:

43
 "If the creditor received a goat as mortgage from the debtor, the creditor
may use its milk to the extent he has spent in providing fodder to the goat.
However, if the milk is more than the price of the fodder, the excess is
riba."
(iii) Imam Maalik has reported the following ruling of Abdullah Ibn Umar, Radi-Allahu
anhu:

"Whoever advances a loan must not stipulate except that the principal loan
shall be repayable."
(iv) Imam Maalik has also narrated in the same chapter that Abdullah Ibn Masood, Radi-
Allahu anhu, used to say.

"Whoever advances a loan cannot stipulate in the agreement that he will

receive something better than he has advanced. Even if it be a handful of
fodder, it is riba."
(v) It is reported by Imam Al-Baihaqi that a person said to Abdullah Ibn Masood, Radi-
Allahu anhu:
"I have taken a loan of 500 from a person on a condition that I shall lend
him my horse for riding.
Abdullah Ibn Masood, Radi-Allahu anhu, answered:
"Whatever benefit of riding your creditor will receive, it will be riba."
(vi) The same author has reported that Sayyidna Anas Ibn Maalik, Radi-Allahu anhu, was
asked about a person who advances a loan to someone and then the debtor gives him
something as a gift, will it be permissible for him to accept that gift? Sayyidna Anas Ibn
Maalik, Radi-Allahu anhu answered that the Holy Prophet, Sall-Allahu alayhi wa sallam,
has said:

"If one of you has advanced a loan and the debtor offer the creditor a bowl
(of food), he should not accept it, or if the debtor offers him a ride of his
animal (cattle) the debtor must not take the ride unless this type of gift has
been a usual practice between them before advancing the loan".
The substance of the hadith is that if the debtor and creditor were on friendly terms with
each other and it was their habit that one of them used to give a gift to the other, then this
type of gift can be acceptable even after the recipient has advanced a loan to the giver.

44
However, if there were no such terms between the creditor and the debtor before the loan
transaction, then the debtor should not accept it, because it will have smell of riba.
(vii) The same author, Al-Baihaqi, has reported from Abdullah Ibn Abbas, Radi-Allahu
anhu, who was asked about a person who owed 20 Dirhams to another person, and started
offering his creditor some gifts. Whenever the creditor received a gift, he sold it in the
market until the aggregate amount received by the creditor reached 13 dirhams. Abdullah
Ibn Abbas, Radi-Allahu anhu, advised the creditor not to take more than 7 dirhams.
(viii) It is reported by Sayyidna Ali, Radi-Allahu anhu, that the Holy Prophet, Sall-Allahu
alayhi wa sallam, has said,

"Every loan that derives a benefit (to the creditor) is riba."

This hadith is reported by Harith ibn Abi Usamah in his Musnad.
100. Mr. Riazul Hasan Gilani, the learned counsel for the Federation of Pakistan assailed
the authenticity of this hadith on the ground that certain scholars of hadith have taken it
as a weak hadith. He referred to Allamah Munawi who has held its chain of narrators as
weak.
101. It is true that certain critics of the hadith have not accepted this tradition as
authentic, because one of its narrators, Sawwar b. Musab, is held to be unreliable. But at
the same time there are other scholars who have accepted the hadith, because despite the
weakness of Sawwar, it is corroborated by other sources. This is the view of Allama
Azizi, Imam Ghazzali and Imam-al-Haramai. However, this controversy relates to the
above narration which attributes this statement to the Holy Prophet, Sall-Allahu alayhi
wa sallam, but there is no dispute among the scholars of hadith in that the same principle
has been enunciated by a number of Sahabah like Sayyidna Fazalah b. Ubaid, Radi-
Allahu anhu, whose following statement is reported by Al-Baihaqi:

"Every loan which derives a benefit is a kind of riba."

102. According to Imam Baihaqi, the same principle is also enunciated by Abdullah b.
Masud, Ubayy b. Kaab, Abdullah b. Salaam and Abdullah b. Abbas, Radi-Allahu anhum.
103. Nobody has disputed the authenticity of these narrations. Even if it is held that the
tradition of Sayyidna Ali, Radi-Allahu anhu, attributing the above statement to the Holy
Prophet, Sall-Allahu alayhi wa sallam,, is not authentic, the same principle has been
established undoubtedly by several companions of the Holy Prophet, Sall-Allahu alayhi
wa sallam. Since the Sahabah were very careful and cautious in mentioning a principle of
Shar'iah, and did not normally base any such principle on their personal opinion, it may
be presumed that the principle enunciated by them unanimously was, in fact, based on a
saying of the Holy Prophet, Sall-Allahu alayhi wa sallam, himself. Even if this
presumption is ignored, these reports are sufficient at least to prove that the concept of
riba, as understood by the Sahabah, includes any increased amount over the principal,
however, little it may be. Obviously, the Sahabah were direct addressees of the Holy
Qur'an. They were much more aware of the context and the background of the verses of
the Holy Qur'an, and therefore, their understanding of a Qur'anic term like riba is the
most authentic basis for its interpretation.
104. Mr. Riazul Hasan Gilani, the learned counsel for the Federation, raised another

45
objection on the authenticity of the above statement. According to him, this statement
suffers from an intrinsic infirmity. If a debtor, he argued, gives an additional amount at
the time of repayment on voluntary basis without any claim from creditor and without a
condition in the original contract of loan, it is never held to be riba. Yet the words used in
the above statement are inclusive of this additional amount also, because the creditor has
derived a benefit from his loan, though without his own initiative. It means that the above
statement cannot be held as a comprehensive and exclusive definition of riba, and such a
loose statement should not be attributed to the Holy Prophet, Sall-Allahu alayhi wa
sallam, or to his companions.
105. This contention of the learned counsel overlooks the colloquial style of the earlier
Arab expressions. Instead of the complex expressions of statutory language, they used to
express the sense in simple style, often conveying a detailed concept in shortest possible
words. In the above statement they have qualified the word Qarz (loan) with the verb
Jerra which lexically means "to pull." The verbal translation of the sentence would be
"Every loan which pulls along with it a benefit is riba." Here the underlined words have
been added to indicate that riba is restricted to a transaction where the loan pulls a benefit
along with it in the sense that the contract of loan itself stipulates a benefit for the
creditor. The statement has, therefore, excluded any voluntary amount given by the
debtor at the time of repayment without pre-determined condition.
106. In the light of the above discussion, there is no force in the contention that the
prohibition of riba is confined to an excessive rate of interest. The directions of the Holy
Qur'an and the Sunnah are quite explicit on the point that any amount, however little,
stipulated in addition to the principal in a transaction of loan is riba, hence prohibited.

Riba al-Fadl and Bank loans

107. Before proceeding further, it will be pertinent to deal with another argument of Mr.
Riazul Hasan Gilani, the learned counsel for the Federation that any increased amount
stipulated in a contract of loan right from the beginning does not fall within the definition
of riba al-Qur'an and that it falls under the definition of riba al-fadl. However, if the
debtor was not able to pay at the date of maturity for a valid reason, any increased
amount imposed upon the debtor for giving him more time does fall in the definition of
riba al-Qur'an. Since the most banking transactions of today stipulate interest right from
the beginning of the transaction, they are not covered, according to the learned counsel,
by the prohibition of riba al-Qur'an, they are rather governed by the principles of riba al-
fadl. He further argued that the enforcement of prohibition of riba al-fadl is not the
obligation of the State. Its implementation is the responsibility of individual Muslims. It
was never enforced in the form of a statute/decree/law by the Holy Prophet, Sall-Allahu
alayhi wa sallam, or by the Khulafa-e-Rashedeen and Muslim rulers of the Islamic
history. He further claimed that the prohibition of riba al-fadl is not applicable to the
non-Muslim residents of Islamic State, hence, it is governed by the term "Muslim
Personal Law" used in article 203 (b) of the Constitution of Pakistan, and therefore it
stands excluded from the jurisdiction of the Federal Shariat Court and the Shariat
Appellate Bench of the Supreme Court of Pakistan.
108. This argument of the learned counsel is based on the unprecedented theory that an
increase stipulated in the initial transaction of loan is riba al-fadl, rather than riba al-
Qur'an. The first leg of this argument which restricts the definition of riba al-Qur'an only

46
to a situation where the creditor increases his claim in exchange of more time given to the
debtor after the maturity of the loan has already been fully discussed in para 43 to 54 of
this judgment where we have held that riba al-Qur'an is not restricted to that situation
alone; it rather includes every transaction where an additional amount is claimed over and
above the principal, whether at initial stage or after the maturity. Let us now deal with the
second leg of this argument that any increase on the principal stipulated in a contract of
loan falls within the definition of riba al-fadl. The learned counsel while explaining the
concept of riba al-fadl went so far that even interest-free loans, he claimed, are covered
by the Prohibition of riba al-fadl, because according to the hadith prohibiting riba al-
fadl, the exchange of the six things inter se must be on spot basis. If gold is exchanged for
its equal quantity of gold without any addition, but the payment of one side is delayed, it
is included in the prohibition of riba al-fadl. Therefore, the learned counsel contended,
any transaction of loan whereby the repayment of the principal money (which stands for
gold or silver) is delayed from one side is riba al-fadl, hence, Makruh even though it is
returned without any addition, because the transaction of gold for gold (or money for
money) is permissible only when two conditions are fulfilled.
(a) That the quantity on both sides are equal
(b) That the exchange is effected on the spot.
109. In an interest-free loan the condition (b) is lacking, while in an interest-based loan
both conditions are missing, but both kinds of loan fall within the definition of riba al-
fadl.
110. This submission of the learned counsel is not tenable at all, because it is based on a
major confusion between the transaction of sale and transaction of loan. The learned
counsel has equated the transaction of loan with the transaction of sale. The hadith
dealing with riba al-fadl refer to a sale transaction, and not to a loan. The exact words of
hadith are:

"Do not sell gold for gold, except in equal quantities...and do not sell the
deferred (gold or silver) for the (gold or silver) delivered on the spot."
111. Here the words "Do not sell" are clear to show that the hadith is speaking of a
transaction of sale and not of a loan. There are many points of difference between the two
transactions. One major difference is that in a sale effected on deferred payment basis, the
seller cannot ask the buyer to pay the price before the stipulated date, while in a
transaction of a simple interest free loan, the creditor may ask the debtor to repay at any
time, and even if a time is stipulated in the transaction of loan, it has only a moral value,
and is not binding legally. That is why a transaction of interest-free loan is allowed, while
the transaction of gold for gold on deferred payment basis is not permissible. The
contention of the learned counsel that even an interest-free loan is covered by riba-al-fadl
is, therefore, fallacious on the face of it because the Holy Prophet, Sall-Allahu alayhi wa
sallam, himself has not only allowed the transactions of interest-free loan but has also
practiced them while he never allowed a sale of gold for gold on deferred payment basis.
The learned counsel has referred to the Ahadith in which the Holy Prophet, Sall-Allahu
alayhi wa sallam, has condemned borrowing loans without genuine need and refused to

47
pray Janaza of a person who died indebted. But here again, the learned counsel has
confused two different issues. The Holy Prophet, Sall-Allahu alayhi wa sallam, did not
condemn borrowing loans because the transaction itself was prohibited, but he did so for
the simple reason that it is not at all advisable for a person to incur the liability of a loan
without a genuine need. Had it been on the basis of the prohibition of the transaction of
loan itself, it would have been prohibited for both the lender and the borrower, but
obviously advancing a loan has never been held as prohibited. The learned counsel
himself referred to a hadith reported by Ibn Majah to the effect that advancing a loan is
more meritorious than spending in charity (Sadaqah). It clearly indicates that the
transaction of loan in itself is not prohibited as a transaction, however, the people are
advised not to incur the liability of a loan without a genuine need. Conversely, a sale of
gold for gold or silver for silver on deferred payment basis is a prohibited transaction in
itself, and this prohibition is applicable to both the parties, and has never been allowed
for any one of them in any case.
112. To sum-up, the Ahadith of riba al-fadl are meant to cover the transactions of sale
only, and have nothing to do with the transaction of loan which are covered by the rules
of riba al-Qur'an or riba al-Jahiliyya and where it is clearly mentioned that the creditor
in a transaction of loan is entitled to claim only his principal amount, and if he does so, it
has never been prohibited. It is, therefore, not correct to say that a transaction of interest-
bearing loan fixing an amount as interest right from the beginning of the transaction is
covered by the prohibition of riba al-fadl rather than the riba al-Qur'an and that the
banking interest being a transaction of riba al-fadl is not haram.

The Jurisdiction of this Court in the Laws of Interest

113. Having held that the interest charged by the banks on their loans is not riba al-fadl
(but it is covered by the definition of riba al-Qur'an) we need not go into the question
whether its prohibition extends to non-Muslims also. However, we would like to note that
even if the standpoint of the learned counsel is accepted for a moment, his argument that
riba al-fadl being applicable to the Muslims only, the laws relating to the banking interest
are within the definition of "Muslim Personal Law" as contemplated in article 203(B) of
the Constitution of Pakistan and therefore they are outside the jurisdiction of the Federal
Shariat Court or the Shariat Appellate Bench of this court, is not sustainable for two
obvious reasons:
114. Firstly, the laws under consideration in the present case are the laws as they exists
today and not the laws as they should have been in the opinion of the learned counsel.
The existing laws do not differentiate between the Muslims and non-Muslims in their
application. They are applicable to non-Muslims as well as to the Muslims of the country.
115. Secondly, the notion that laws applicable to Muslims only fall under the definition
of "Muslim Personal Law" for the purpose of article 203(B) of the Constitution is,
perhaps, based on a previous judgment of this court in the case of Mst. Farishta (PLD
1981 SC 120). But seemingly the learned counsel is not cognizant of the fact that the
view taken by the Court in this case was later reviewed in a subsequent judgment of this
Court in the case of Dr. Mahmoodurrahman Faisal Vs. The Government of Pakistan
(PLD 1994 SC 607) where it is held that the statute laws, even though applicable only to
Muslims in general, do not fall under the term "Muslim Personal Law" for the purpose of
article 203 (B) of the Constitution. Therefore, the submission of the learned counsel that

48
the laws relating to bank interest stand excluded from the jurisdiction of this court, is not
tenable at any score.

Basic Cause of Prohibition

116. The next argument advanced by some appellants is that the basic cause (illat) of the
prohibition of riba is Zulm (injustice). The Holy Qur'an says:

"And if you repent (from charging interest) then you are entitled to your
principal. You neither wrong nor be wronged." [Al-Baqarah 2:279]
117. Here the words "neither you wrong nor be wronged" indicate that the basic illat of
the prohibition is zulm. It is argued by some appellants that there is no zulm (injustice) at
all in charging interest from a rich person who has borrowed money to earn huge profits
therewith. Since the basic illat of the prohibition is missing in the commercial interest
charged by the banks and the financial institutions, it cannot be held as prohibited. The
same argument was partly advanced by Mr. Khalid M. Ishaque, advocate, who, despite
his health constraints, was kind enough to appear in this case as a juris-consult. However,
instead of claiming that all the transactions of loan in the present banking system are
permissible, Mr. Khalid Ishaq has opined that every individual transaction should be
analyzed separately taking into account the surrounding situation of that particular
transaction. The focus of the analysis, according to him, should be on the question
whether there is an element of zulm in the given situation. In case there is a zulm, the
transaction should be taken as riba, hence prohibited, but if there is no zulm it should not
be taken as haram.
118. We have paid due consideration to this line of argument but were not able to
subscribe to it. The argument is based on two assumptions: firstly, that the basic illat of
the prohibition is zulm, and secondly, that there is no zulm in the modern interest based
transactions or at least there may be some interest-based transactions which have no
element of zulm. Both these legs of this argument, after a deeper study, have been found
untenable. Let us analyze each one of these two assumptions separately.

The Difference between Illat and Hikmat

119. The first assumption which takes zulm as the basic illat of the prohibition of riba is
in fact based on confusing the Illat with the Hikmat of a prohibition. It is a well settled
principle of Islamic jurisprudence that there is a big difference between the Illat and the
Hikmat of a particular law. The Illat is the basic feature of a transaction without which
the relevant law cannot be applied to it, whereas the Hikmat is the wisdom and the
philosophy taken into account by the legislator while framing the law or the benefit
intended to be drawn by its enforcement. The principle is that the application of a law
depends on the Illat and not on the Hikmat. In other words, if the Illat (the basic feature
of the transaction) is present in a particular situation while the Hikmat (the wisdom) is
not visualized, the law will still be applicable. This principle is recognized in the secular
laws also. Let us take a simple example. The law has made it compulsory for the vehicles
running on the roads to stop when the red street light is on. The Illat of this law is the red
light, while the Hikmat is to avoid the chances of accidents. Now, the law will be
applicable whenever the red light is on; its application will not depend on whether or not

49
there is an apprehension of an accident. Therefore, if the red light is on, every vehicle
must stop, even though the roads of both sides have no other traffic at all. In this
particular case, the basic wisdom (hikmat) of the law is not discernable, because there is
no apprehension of any accident in any way. Still the law will be applicable in its full
force, because the red light which was the real Illat of the law is present. To cite another
example, the Holy Qur'an has prohibited liquor. The Illat of its prohibition is intoxication
but the Hikmat of this prohibition has been mentioned by the Holy Qur'an in the
following words:

"The Satan definitely intends to inculcate enmity and hatred between you
by means of liquor and gambling, and wants to prevent you from
remembering Allah. So would you not desist?" (5:91)
120. The philosophy of the prohibition of liquor and gambling given by the Holy Qur'an
in this verse is that liquor inculcates enmity and hatred between people and it prevents
them from remembering Allah. Can one say that he has been using liquor for a long time
but it never resulted in having enmity with anyone, and therefore, the basic Illat of the
prohibition being not present, he should be allowed to use liquor? Or can one reasonably
argue that drinking wine has never prevented him from offering prayers at their due
times, and therefore, the basic cause of prohibition mentioned by the Holy Qur'an being
absent, the drinking should be held as permissible. Obviously, no one can accept these
arguments because the enmity and hatred referred to by the Holy Qur'an in the above
verse is not intended to be the Illat of the prohibition. It simply spells out some bad
results which the liquor and gambling often produce. They have been mentioned as a
Hikmat and the philosophy of the prohibition, but the prohibition itself does not depend
on these results. It is in the same way that after prohibiting the transaction of riba, the
Holy Qur'an has mentioned the Zulm as a Hikmat or a philosophy of the prohibition, but
it does not mean that prohibition will not be applicable if the element of Zulm appears to
be missing in a particular case. The Illat (the basic feature) on which the prohibition is
based is the excess claimed over and above the principal in a transaction of loan, and as
soon as this Illat is present, the prohibition will follow regardless of whether the
philosophy of the law is or is not visible in a particular transaction.
121. Another point worth mentioning here is that the Illat of a law is always something
determinable by hard and fast definition which leaves no room for a dispute as to whether
the Illat is or is not available. Any relative term which is ambiguous in nature cannot be
held to be the Illat of a particular law because its existence being susceptible to doubts
and disputes, it would defeat the very purpose of the law. The Zulm (Injustice) is a
relative and rather ambiguous term the exact definition of which is very difficult to
ascertain. Every person may have his own view about what is or what is not Zulm. All
the disputing political and economic systems of the world, in fact, claimed to abolish
Zulm, but what was regarded as Zulm in one system has been held as justified in another.
The communist theory of economy is of the firm view that the private property in itself is
a Zulm, while the capitalist theory asserts that abolishing private property is the zulm.

50
Such an ambiguous term is not competent to be the Illat of a particular law.
122. Mr. Khalid M. Ishaque, advocate, who appeared as a juris-consult in this case,
adopted another approach. According to him, non-availability of a hard and fast
definition of 'zulm' or riba should be taken as a blessing from Allah, for it provides
elasticity to the Muslims of every age to determine what is zulm in the given situations of
their time. In his written statement the learned juris-consult has expressed himself in the
following words:
a) Misdirected efforts towards definition-making ought to be discontinued.
Absence of definition of riba in the Qur'an should be accepted as such and
rather be looked upon as a mercy for mankind. The deliberate omission of
a rigid definition would propel Muslims to come up with their own
guiding and evolving principles of identifying zulm in space-time
situations. Economic conditions are not static and nor are human
situations.
b) A sound economic policy ought to include "all purposeful
governmental action whose actual and professed primary objective is the
improvement of the economic welfare of the whole population for which
government is responsible, not of some segment of that population." The
Islamic concept of economy is not inimical or dissimilar to the above. As
such, an Islamic approach should neither be insulated and detached from
an economistic approach/program nor should it be in ignorance of the
same as they need not be mutually exclusive.
Jurists should not close their mind to the possibility that both can be
synergized to arrive at the most beneficial and fair outcome. Very
typically, whenever Muslim jurists have not kept themselves abreast with
or informed of contemporary disciplines (economics is a case in point),
they have a tendency to become averse to it, treat it with suspicion, regard
it as a hazard and simply label it as un-Islamic to avoid study of the same.
123. We paid due consideration to this approach, but with due respect to the learned juris-
consult, this argument seems to overlook some fundamental points:
124. Firstly, the learned juris-consult has taken the deliberate omission of a rigid
definition of riba (by the Holy Qur'an) as a mercy for mankind. This argument appears to
presume that the Holy Qur'an normally gives definitions of the acts prohibited by it, but
in the case of riba the Holy Qur'an deliberately omitted to give a rigid definition. The
fact, however, is that the Holy Qur'an has hardly given a legal definition to any one of its
prohibitions. No definition is given for khamr (liquor), nor for qimar (gambling) nor for
zina (adultery or fornication) nor for theft, nor for robbery, nor for kufr. Similarly the
Holy Qur'an did not define its imperatives like Salat, Sawm (fasting), Zakah, Hajj or
Jihad. Should we, then, say that none of these concepts has a specific meaning and all
these injunctions are therefore subject to ever-changing whims based on "space-time
situations"? The Holy Qur'an, in fact, did not give legal definitions to these concepts
because their meanings were too obvious to need an express definition. Some ancillary
details of these concepts might have not been so clear and might have given rise to
differences of opinion, but it does not mean that the basic concept of all these injunctions
has been floated in void or vacuum, having no specific sense at all.
125. Secondly, the learned juris-consult has succinctly outlined the basic features of a

51
sound economic policy in the italicized portion of the above extract. One can hardly
question its soundness. Almost all the economic systems claim to strive for the same
objectives, but the question is how to achieve them? It is the answer to this very question
that has divided different economic systems into conflicting rivals. The learned juris-
consult suggests that "Islamic approach should not be insulated and detached from an
economistic approach/program." The suggestion seems to be substantially reasonable, but
when this suggestion is given in the context of leaving the definition of riba unsettled and
"evolving principles of identifying zulm in space-time situations" it apparently means
that it is the pure economic approach which will play a decisive role in identifying zulm
in a particular situation and in turn determining what is halal or haram in Shar'iah. Once it
is taken for granted, the question is "which economic approach"? There are numerous
theories, conflicting with each other, but each one of them pretending to race towards the
sound economic policy of "improving the economic welfare of the whole population."
The basic economic goals of a welfare economy are recognized by almost everyone
thinking on economic subjects. However, it is the strategy for translating these objectives
into reality that makes a big difference. The Islamic strategy to achieve these goals is
neither too narrow to accommodate the ever-changing needs of the humanity or too
biased to interact with the modern thought, nor is it too dependent on the modern theories
to make its own way towards these goals. Islam has no problem in welcoming any
constructive suggestion from whatever quarter it may have come, but at the same time it
has its own principles on which no compromise is possible, because they are based on
divine guidance, the most distinct feature of the Islamic economy that draws the line of
difference between the Islamic and secular economies - and the prohibition of riba is one
of those basic principles. To leave this principle at the mercy of the secular economic
policies is, therefore, like placing the cart before the horse.
126. Thirdly, abolishing zulm (injustice) is not the hikmat or purpose of the prohibition of
riba alone. It is the reson' detre of most of the Islamic injunctions relating to business and
trade. But whenever the Holy Qur'an and Sunnah gave a specific command or prohibition
in these areas, they did not rely on the rational assessment of the people, nor did they
leave these transactions at the mercy of human reason to decide whether or not they have
an element of Zulm. If the Holy Qur'an and the Sunnah intended to entrust such a
decision to the human intellect alone, they would have not revealed such a long list of
commands and prohibitions; they would have rather issued one single command that all
people must avoid zulm in all their transactions. But the Holy Qur'an and Sunnah were
cognizant of the fact that human reason, despite its wide capabilities, cannot claim to
have unlimited power to reach the truth. After all, it has some limits beyond which it
either cannot properly work or may fall prey to errors. There are many areas of human
life where "reason" is often confused with "desires" and where unhealthy instincts, under
the garb of rational arguments, misguide the humanity and demonstrate the unjust
attitudes in the disguised form of justice. It is these areas where human reason needs the
guidance of divine revelation, and it is the divine revelation which finally decides as to
which human attitude actually falls within the limits of "zulm" or injustice, even though it
appears to be just in the eyes of some secular rationalists, and it is in such issues that the
divine revelations come with a specific command that prevails upon the rational
arguments advanced by differing opinions. That is exactly what happened in the case of
riba. The secular rationalists were fully content with their belief that riba transactions

52
practiced by them were quite justified, because the income they earn through interest is
very similar to the profit they earn through sales. That is why they confronted the
prohibition of riba by their rational argument quoted by the Holy Qur'an in the following
words:

Sale is nothing but similar to riba. [Al-Baqarah 2:275]

127. They intended that if a profit claimed in a transaction of sale is just and lawful, there
is no reason why an interest claimed in a transaction of loan is held to be unjust and
unlawful. In answer to this argument of theirs, the Holy Qur'an could have mentioned the
difference between interest and profit in pure logical manner, and could have explained
how the profit in a sale is justified while the interest is not. The Holy Qur'an could have
also spelled out the evil consequences of riba on the economy. But this line of argument
was intentionally avoided, and the brief and simple answer given by the Holy Qur'an was:

"Allah has allowed the sale and has prohibited interest." [Al-Baqarah
2:275]
128. The hint given in this verse is that the question whether these transactions have an
element of injustice is not left to be decided by human reason alone, because the reason
of different individuals may come up with different answers and no absolute conclusion
of universal application may be arrived at on the basis of pure rational arguments. The
correct principle, therefore, is that once a particular transaction is held by Allah to be
haram, there is no room for disputing it on the basis of pure rational argumentation
because Allah's knowledge and wisdom encompasses all those points which are not
accessible to ordinary reason. If the human reason was fully competent to reach the
correct decision unanimously in each and every issue, no divine revelation would be
called for. There is a wide area of human conduct in which the Creator did not give a
specific command. It is this area where human reason can well play its role, but it should
not be burdened to play the role of a rival to the express divine injunctions.
129. The Qur'anic verse referring to zulm (Injustice) in the context of riba should be
studied in this perspective. The exact words of the verse are:

"And if you repent (from claiming riba), then you are entitled to get your
principal back. Neither you wrong nor be wronged." [Al-Baqarah 2:279]
130. Before referring to zulm, the Qur'anic verse has laid down the precise principle that
no one can be deemed to have repented from the practice of riba unless he has withdrawn
from claiming any additional amount over and above the principal, but on the other hand
he is fully entitled to get back his principal, and his debtor is bound to pay him the full
amount of loan. If the debtor will not pay the principal, he will be committing injustice
against the creditor, and if the creditor will claim something more than the principal, he
will be committing injustice to the debtor.
131. Thus the Holy Qur'an did not leave it to the assessment of the parties to decide what

53
is injustice and what is not. Instead, the Holy Book itself has precisely decided what is
injustice for each one of the two parties in a transaction of loan. Therefore, the notion that
the permissibility of different transactions of interest should be judged on the basis of
human assessment is tantamount to defeating the very purpose of the revelation and is
not, therefore, acceptable.

Rationale of the Prohibition of Riba

132. Now we come to the second leg of the argument which contends that no element of
injustice is found in the commercial or banking interest.
133. Although, in the light of the above discussion, the Holy Qur'an has itself decided
what is injustice in a transaction of loan, and it is not necessary that everybody finds out
all the elements of injustice in a riba transaction, yet the evil consequences of interest
were never so evident in the past than they are today. Injustice in a personal consumption
loan was restricted to a debtor only, while the injustice brought by the modern interest
affects the economy as a whole. A detailed account of the rationale of the prohibition of
riba would, in fact, require a separate volume, but for the purpose of brevity we would
concentrate on three aspects of the issue:
(a) The logic of the prohibition on theoretical ground
(b) The evil effects of interest on production
(c) The evil effects of interest on distribution.
134. On pure theoretical ground, we would like to focus on two basic issues; firstly on the
nature of money and secondly on the nature of a loan transaction.

Nature of Money
135. One of the wrong presumptions on which all theories of interest are based is that
money has been treated as a commodity. It is, therefore, argued that just as a merchant
can sell his commodity for a higher price than his cost, he can also sell his money for a
higher price than its face value, or just as he can lease his property and can charge a rent
against it, he can also lend his money and can claim interest thereupon.
136. Islamic principles, however, do not subscribe to this presumption. Money and
commodity have different characteristics and therefore they are treated differently. The
basic points of difference between money and commodity are as follows:
(a) Money has no intrinsic utility. It cannot be utilized in direct fulfillment
of human needs. It can only be used for acquiring some goods or services.
A commodity, on the other hand, has intrinsic utility and can be utilized
directly without exchanging it for some other thing.
(b) The commodities can be of different qualities while money has no
quality except that it is a measure of value or a medium of exchange.
Therefore, all the units of money of the same denomination, are hundred
per cent equal to each other. An old and dirty note of Rs.1000/= has the
same value as a brand new note of Rs.1000/=.
(c) In commodities, the transactions of sale and purchase are effected on
an identified particular commodity. If A has purchased a particular car by
pin-pointing it, and seller has agreed, he deserves to receive the same car.
The seller cannot compel him to take the delivery of another car, though of
the same type or quality.

54
 Money, on the contrary, cannot be pin-pointed in a transaction of
exchange. If A has purchased a commodity from B by showing him a
particular note of Rs.1000/- he can still pay him another note of the same
denomination.
137. Based on these basic differences, Islamic Shar'iah has treated money differently
from commodities, especially on two scores:
138. Firstly, money (of the same denomination) is not held to be the subject-matter of
trade, like other commodities. Its use has been restricted to its basic purpose i.e. to act as
a medium of exchange and a measure of value.
139. Secondly, if for exceptional reasons, money has to be exchanged for money or it is
borrowed, the payment on both sides must be equal, so that it is not used for the purpose
it is not meant for i.e. trade in money itself.
140. Imam Al-Ghazzali (d.505 A.H.) the renowned jurist and philosopher of the Islamic
history has discussed the nature of money in an early period when the Western theories of
money were non-existent. He says:
"The creation of dirhams and dinars (money) is one of the blessings of
Allah…. They are stones having no intrinsic usufruct or utility, but all
human beings need them, because every body needs a large number of
commodities for his eating, wearing etc, and often he does not have what
he needs and does have what he needs not.. Therefore, the transactions of
exchange are inevitable. But there must be a measure on the basis of
which price can be determined, because the exchanged commodities are
neither of the same type, nor of the same measure which can determine
how much quantity of one commodity is a just price for another.
Therefore, all these commodities need a mediator to judge their exact
value…. Allah Almighty has, therefore, created dirhams and dinars
(money) as judges and mediators between all commodities so that all
objects of wealth are measured through them… and their being the
measure of the value of all commodities is based on the fact that they are
not an objective in themselves. Had they been an objective in themselves,
one could have a specific purpose for keeping them which might have
given them more importance according to his intention while the one who
had no such purpose would have not given them such importance and thus
the whole system would have been disturbed. That is why Allah has
created them, so that they may be circulated between hands and act as a
fair judge between different commodities and work as a medium to
acquire other things…. So, the one who owns them is as he owns every
thing, unlike the one who owns a cloth, because he owns only a cloth,
therefore, if he needs food, the owner of the food may not be interested in
exchanging his food for cloth, because he may need an animal for
example. Therefore, there was needed a thing which in its appearance is
nothing, but in its essence is everything. The thing which has no particular
form may have different forms in relation to other things like a mirror
which has no color, but it reflects every color. The same is the case of
money. It is not an objective in itself, but it is an instrument to lead to all
objectives…

55
 So, the one who is using money in a manner contrary to its basic purpose
is, in fact, disregarding the blessings of Allah. Consequently, whoever
hoards money is doing injustice to it and is defeating their actual purpose.
He is like the one who detains a ruler in a prison…
And whoever effects the transactions of interest on money is, in fact,
discarding the blessing of Allah and is committing injustice, because
money is created for some other things, not for itself. So, the one who has
started trading in money itself has made it an objective contrary to the
original wisdom behind its creation, because it is injustice to use money
for a purpose other than what it was created for…. If it is allowed for him
to trade in money itself, money will become his ultimate goal and will
remain detained with him like hoarded money. And imprisoning a ruler or
restricting a postman from conveying messages is nothing but injustice."
141. This brief, yet comprehensive, analysis of the nature of money, undertaken by Imam
Al-Ghazzali about nine hundred years ago, is admitted to be true by the economists who
came centuries after him. That money is only a medium of exchange and a measure of
value is universally accepted by almost all the economists of the world, but unfortunately
a large number of these economists failed to recognize the logical outcome of this
concept, so clearly elaborated by Imam al-Ghazzali: that money should not be treated as a
commodity meant for being traded in. After holding that money is a commodity, the
modern economists have plunged into a dilemma that was never resolved satisfactorily.
The commodities are classified into the commodities of first order which are normally
termed as "consumption goods" and the commodities of the higher order which are called
"productive goods." Since money, having no intrinsic utility, could not be included in
"consumption goods" most of the economists had no option but to put it under the
category of "production goods", but it was hardly proved by sound logical arguments that
money is a "production good." Ludwig Von Mises, the well-known economist of the
present century has dealt with the subject in detail. He says:
"Of course, if we regard the twofold division of economic goods as
exhaustive, we shall have to rest content with putting money in one group
or the other. This has been the position of most economists; and since it
has seemed altogether impossible to call money a consumption good,
there has been no alternative but to call it a production good."
142. After citing different arguments in support of this view, he comments as follows:
"It is true that the majority of economists reckon money among production
goods. Nevertheless, arguments from authority are invalid; the proof of a
theory is in its reasoning, not in its sponsorship; and with all due respect
for the masters, it must be said that they have not justified their position
very thoroughly in the matter."
143. He then concludes:
"Regarded from this point of view, those goods that are employed as
money are indeed what Adam Smith called them, 'dead stock, which...
produces nothing.'"
144. The author has then expressed his inclination to the Kien's theory that money is
neither a consumption good nor a production good; it is a medium of exchange.
145. The logical result of this finding would have been that money should not be taken as

56
an instrument that gives birth to more money on daily basis, nor should it have been
taken as a tradable commodity, when it is exchanged for another money of the same
denomination, because once it is accepted that money is neither consumption good nor
production good, and that it is merely a medium of exchange, then there remains no room
for making itself an object of profitable trade, for it will be like a mediator himself has
been made a party. But, perhaps due to the overwhelming domination of interest-based
monetary system, many economists did not proceed any further in this direction.
146. Imam Al-Ghazzali, on the other hand, has taken the concept of "medium of
exchange" to its logical end. He has concluded that when money is exchanged for money
of the same denomination, it should never be made an instrument generating profit by
such exchange.
147. This approach of Imam al-Ghazzali, fully backed by the clear directives of the Holy
Qur'an and Sunnah, has however been admitted to be true by some realistic scholars,
even in societies dominated by interest. Many of them after facing the severe
consequences of their financial system based on trade in money have admitted that their
economic plight was caused, inter alia, by the fact that money was not restricted to be
used for its primary function as a medium of exchange.
148. During the horrible depression of 1930s, an "Economic Crisis Committee" was
formed by Southampton Chamber of Commerce in January 1933. The Committee
consisted of ten members headed by Mr. E. Dennis Mundy. In its report the committee
had discussed the root causes of the calamitous depression in national and international
trade and had suggested different measures to overcome the problem. After discussing
the pitfalls of the existing financial system, one of the committee's recommendation was
that:
"In order to ensure that money performs its true function of operating as a
means of exchange and distribution, it is desirable that it should cease to
be traded as a commodity."
149. This real nature of money which should have been appreciated as a fundamental
principle of the financial system remained neglected for centuries, but it is now
increasingly recognized by the modern economists. Prof. John Gray (of Oxford
University), in his recent work False Dawn has remarked as follows:
"Most significantly, perhaps transactions on foreign exchange markets
have now reached the astonishing sum of around $1.2 trillion a day, over
fifty times the level of the world trade. Around 95 percent of these
transactions are speculative in nature, many using complex new
derivative's financial instruments based on futures and options. According
to Michael Albert, the daily volume of transactions on the foreign
exchange markets of the world holds some $900 billions - equal to
France's annual GDP and some $200 million more than the total foreign
currency reserves of the world central banks.
This virtual financial economy has a terrible potential for disrupting the
underlying real economy as seen in the collapse in 1995 of Earings,
Britain's oldest bank."
The size of derivatives mentioned by John Gray was, by the way, of their daily
transactions. The size of their total worth, however, is much greater. It is mentioned by
Richard Thomson in his "Apocalypse Roulette" in the following words:

57
 "Financial derivatives have grown, more or less from standing starting in
the early 1970s, to a $64 trillion (that's $64,000,000,000,000) industry by
1996. How do you imagine a number that big? You could say that if you
laid all those dollar bills end to end, they would stretch from here to the
sun sixty-six times, or to the moon 25,900 times;"
150. James Robertson observes in his latest work, Transforming Economic Life in the
following words:
"Today's money and finance system is unfair, ecologically destructive and
economically inefficient. The money-must-grow imperative drives
production (and thus consumption) to higher than necessary levels. It
skews economic effort towards money out of money, and against
providing real services and goods…
…(It) also results in a massive world-wide diversion of effort away from
providing useful goods and services, into making money out of money. At
least 95% of the billions of dollars transferred daily around the world are
for purely financial transactions, unlinked to transactions in the real
economy."
151. This is exactly what Imam Al-Ghazzali had pointed out nine hundred years ago. The
evil results of such an unnatural trade have been further explained by him at another
place, in the following words:
"Riba (interest) is prohibited because it prevents people from undertaking
real economic activities. This is because when a person having money is
allowed to earn more money on the basis of interest, either in spot or in
deferred transactions, it becomes easy for him to earn without bothering
himself to take pains in real economic activities. This leads to hampering
the real interests of the humanity, because the interests of the humanity
cannot be safeguarded without real trade skills, industry and
construction."
152. It seems that Imam Al-Ghazzali had, in that early age, pointed out the phenomenon
of monetary factors prevailing on production, creating a wide gap between the supply of
money and the supply of real goods which has emerged in the later days as the major
cause of inflation, almost the same "terrible potential" of trading in money as explained
by John Gray and James Robertson in their above extracts. We will examine this aspect a
little later, but what is important at this point is the fact that money, being a medium of
exchange and a measure of value cannot be taken as a "production good" which yields
profit on daily basis, as is presumed by the theories of interest. This is a mediator and it
should be left to play this exclusive role. To make it an object of profitable trade disturbs
the whole monetary system and brings a plethora of economic and moral hazards to the
whole society.

The Nature of Loan

153. Another major difference between the secular capitalist system and the Islamic
principles is that under the former system, loans are purely commercial transactions
meant to yield a fixed income to the lenders. Islam, on the other hand, does not recognize
loans as income-generating transactions. They are meant only for those lenders who do
not intend to earn a worldly return through them. They, instead, lend their money either

58
on humanitarian grounds to achieve a reward in the Hereafter, or merely to save their
money through a safer hand. So far as investment is concerned, there are several other
modes of investment like partnership etc which may be used for that purpose. The
transactions of loan are not meant for earning income.
154. The basic philosophy underlying this scheme is that the one who is offering his
money to another person has to decide whether:
(a) He is lending money to him as a sympathetic act or
(b) He is lending money to the borrower, so that his principal may be
saved or
(c) He is advancing his money to share the profits of the borrower.
155. In the former two cases (a) and (b) he is not entitled to claim any additional amount
over and above the principal, because in case (a) he has offered financial assistance to the
borrower on humanitarian grounds or any other sympathetic considerations, and in case
(b) his sole purpose is to save his money and not to earn any extra income.
156. However, if his intention is to share the profits of the borrower, as in case (c), he
shall have to share his loss also, if he suffers a loss. In this case, his objective cannot be
served by a transaction of loan. He will have to undertake a joint venture with the
opposite party, whereby both of them will have a joint stake in the business and will
share its outcome on fair basis. Conversely, if the intent of sharing the profit of the
borrower is designed on the basis of an interest-based loan, it will mean that the financier
wants to ensure his own profit, while he leaves the profit of the borrower at the mercy of
the actual outcome of the business. There may be a situation where the business of the
borrower totally fails. In this situation he will not only bear the whole loss of the
business, but he also will have to pay interest to the lender, meaning thereby that the
profit or interest of the financier is guaranteed at the price of the destructive loss of the
borrower, which is obviously a glaring injustice.
157. On the other hand, if the business of the borrower earns huge profits, the financier
should have shared in the profit in reasonable proportion, but in an interest-based system,
the profit of the financier is restricted to a fixed rate of return which is governed by the
forces of supply and demand of money and not on the actual profits produced on the
ground. This rate of interest may be much less than the reasonable proportion a financier
might have deserved, had it been a joint venture. In this case the major part of the profit is
secured by the borrower, while the financier gets much less than deserved by his input in
the business, which is another form of injustice.
158. Thus, financing a business on the basis of interest creates an unbalanced atmosphere
which has the potential of bringing injustice to either of the two parties in different
situations. That is the wisdom for which the Shar'iah did not approve an interest based
loan as a form of financing.
159. Once the interest is banned, the role of "loans" in commercial activities becomes
very limited, and the whole financing structure turns out to be equity-based and backed
by real assets. In order to limit the use of loans, the Shar'iah has permitted to borrow
money only in cases of dire need, and has discouraged the practice of incurring debts for
living beyond one's means or to grow one's wealth. The well-known event that the Holy
Prophet, Sall-Allahu alayhi wa sallam, refused to offer the funeral prayer (salat-ul
janazah) of a person who died indebted was, in fact, to establish the principle that
incurring debt should not be taken as a natural or ordinary phenomenon of life. It should

59
be the last thing to be resorted to in the course of economic activities. This is one of the
reasons for which interest has been prohibited, because, given the prohibition of interest,
no one will be agreeable to advance a loan without a return for unnecessary expenses of
the borrower or for his profitable projects. It will leave no room for unnecessary expenses
incurred through loans. The profitable ventures, on the other hand, will be designed on
the basis of equitable participation and thus the scope of loans will remain restricted to a
narrow circle.
160. Conversely, once the interest is allowed, and advancing loans, in itself, becomes a
form of profitable trade, the whole economy turns into a debt-oriented economy which
not only dominates over the real economic activities and disturbs its natural functions by
creating frequent shocks, but also puts the whole mankind under the slavery of debt. It is
no secret that all the nations of the world, including the developed countries, are drowned
in national and foreign debts to the extent that the amount of payable debts in a large
number of countries exceeds their total income. Just to take one example of UK, the
household debt in 1963 was less than 30% of total annual income. In 1997, however, the
percentage of household debt rose up to more than 100% of the total income. It means
that the household debt throughout the country, embracing rich and poor alike, represents
more than the entire gross annual incomes of the country. Consumers have borrowed, and
made purchases against their future earnings, equivalent to more than the entirety of their
annual incomes. Peter Warburton, one of the UK's most respected financial
commentators and a past winner of economic forecasting awards, has commented on this
situation as follows:
"The credit and capital markets have grown too rapidly, with too little
transparency and accountability. Prepare for an explosion that will rock
the western financial system to its foundation."

Overall Effects of Interest

161. Interest-based loans have a persistent tendency in favor of the rich and against the
interests of the common people. It carries adverse effects on production and allocation of
resources as well as on distribution of wealth. Some of these effects are the following:

(a) Evil Effects on Allocation of Resources

162. Loans in the present banking system are advanced mainly to those who, on the
strength of their wealth, can offer satisfactory collateral. Dr. M, Umar Chapra (Senior
Economic Advisor to Saudi Arabian Monetary Agency) who appeared in this case as a
juris-consult has summarized the effects of this practice in the following words:
"Credit, therefore, tends to go to those who, according to Lester Thurow,
are 'lucky rather than smart or meritocratic. The banking system thus tends
to reinforce the unequal distribution of capital. Even Morgen Guarantee
Trust Company, sixth largest bank in the U.S. has admitted that the
banking system has failed to 'finance either maturing smaller companies or
venture capitalist' and 'though awash with funds, is not encouraged to
deliver competitively priced funding to any but the largest, most cash-rich
companies. Hence, while deposits come from a broader cross-section of
the population, their benefit goes mainly to the rich."
(Dr. Chapra's written statement under the caption "Why has Islam

60
 prohibited Interest?" P.18)
163. The veracity of this statement can be confirmed by the fact that according to the
statistics issued by the State Bank of Pakistan in September 1999, 9269 account holders
out of 2,184,417 (only 0.4243% of total account holders) have utilized Rs.438.67 billion
which is 64.5% of total advances as of end December 1998.

(b) Evil Effects on Production

164. Since in an interest-based system funds are provided on the basis of strong collateral
and the end-use of the funds does not constitute the main criterion for financing, it
encourages people to live beyond their means. The rich people do not borrow for
productive projects only, but also for conspicuous consumption. Similarly, governments
borrow money not only for genuine development programs, but also for their lavish
expenditure and for projects motivated by their political ambitions rather than being
based on sound economic assessment. Non-project-related borrowings, which were
possible only in an interest-based system have thus helped in nothing but increasing the
size of our debts to a horrible extent. According to the budget of 1998/99 in our country
46 percent of the total government spending is devoted to debt-servicing, while only 18%
is allocated for development which includes education, health and infrastructure.

(c) Evil Effects on Distribution

165. We have already pointed out that when business is financed on the basis of interest,
it may bring injustice either to the borrower if he suffers a loss, or to the financier if the
debtor earns huge profits. Although both situations are equally possible in an interest-
based system, and there are many examples where the payment of interest has brought
total ruin to the small traders, yet in our present banking system, the injustice brought to
the financier is more pronounced and much more disturbing to the equitable distribution
of wealth.
166. In the context of modern capitalist system, it is the banks which advance depositors'
money to the industrialists and traders. Almost all the giant business ventures are mostly
financed by the banks and financial institutions. In numerous cases the funds deployed by
the big entrepreneurs from their own pocket are much less than the funds borrowed by
them from the common people through banks and financial institutions. If the
entrepreneurs having only ten million of their own, acquire 90 million from the banks and
embark on a huge profitable enterprise, it means that 90% of the projects is created by the
money of the depositors while only 10% was generated by their own capital. If these
huge projects bring enormous profits, only a small proportion (of interest which normally
ranges between 2% to 10% in different countries) will go to the depositors whose input in
the projects was 90% while all the rest will be secured by the big entrepreneurs whose
real contribution to the projects was not more than 10%. Even this small proportion given
to the depositors is taken back by these big entrepreneurs, because all the interest paid by
them is included in the cost of their production and comes back to them through the
increased prices. The net result in this case is that all the profits of the big enterprises is
earned by the persons whose own financial input does not exceed 10% of the total
investment, while the people whose financial contribution was as high as 90% get
nothing in real terms, because the amount of interest given to them is often repaid by
them through the increased prices of the products, and therefore, in a number of cases the

61
return received by them becomes negative in real terms.
167. While this phenomenon is coupled with the fact, already mentioned, that 64.5% of
total advances went only to 0.4243% of total account holders, it means that the profits
generated mostly by the money of millions of people went almost exclusively to 9,269
borrowers. One can imagine how far the interest-based borrowings have contributed to
the horrible inequalities found in our system of distribution, and how great is the injustice
brought by the modern commercial interest to the whole society as compared to the
interest charged on the old consumption loans that affected only some individuals.
168. How the present interest-based system works to favor the rich and kill the poor is
succinctly explained by James Robertson in the following words:
"The pervasive role of interest in the economic system results in the
systematic transfer of money from those who have less to those who have
more. Again, this transfer of resources from poor to rich has been made
shockingly clear by the Third World debt crisis. But it applies universally.
It is partly because those who have more money to lend, get more in
interest than those who have less; it is partly because those who have less,
often have to borrow more; and it is partly because the cost of interest
repayments now forms a substantial element in the cost of all goods and
services, and the necessary goods and services looms much larger in the
finances of the rich. When we look at the money system that way and
when we begin to think about how it should be redesigned to carry out its
functions fairly and efficiently as part of an enabling and conserving
economy, the argument for an interest-free inflation-free money system
for the twenty-first century seems to be very strong."
169. The same author in another book comments as follows:
"The transfer of revenue from poor people to rich people, from poor places
to rich places, and from poor countries to rich countries by the money and
finance system is systematic.... One cause of the transfer of wealth from
poor to rich is the way interest payments and receipts work through the
economy."

(d) Expansion of Artificial Money and Inflation

170. Since interest-bearing loans have no specific relation with actual production, and the
financier, after securing a strong collateral, normally has no concern how the funds are
used by the borrower, the money supply effected through banks and financial institutions
has no nexus with the goods and services actually produced on the ground. It creates a
serious mismatch between the supply of money and the production of goods and services.
This is obviously one of the basic factors that create or fuel inflation.
171. This phenomenon is aggravated to a horrible extent by the well-known characteristic
of the modern banks normally termed as "money creation." Even the introductory books
of economics usually explain, often with complacence, how the banks create money. This
apparently miraculous function of the banks is sometimes taken to be one of the factors
that boost production and bring prosperity. But the illusion underlying this concept, is
seldom unveiled by the champions of modern banking.
172. The history of "money creation" refers back to the famous story of the goldsmiths of
medieval England. The people used to deposit their gold coins with them in trust, and

62
they used to issue a receipt to the depositors. In order to simplify the process, the
goldsmiths started issuing "bearer" receipts which gradually took the place of gold coins
and the people started using them in settlement of their liabilities. When these receipts
gained wide acceptability in the market, only a small fraction of the depositors or bearers
ever came to the goldsmiths to demand actual gold. At this point the goldsmiths began
lending out some of the deposited gold secretly and thus started earning interest on these
loans. After some time they discovered that they could print more money (i.e. paper gold
deposit certificates) than actually deposited with them and that they could loan out this
extra money on interest. They acted accordingly and this was the birth of "money
creation" or "fractional reserve lending" which means to loan out more money than one
has as a reserve for deposits. In this way these goldsmiths, after becoming more
confident, started decreasing the reserve requirement and increasing the percentage of
their self-created credit, and used to loan out four, five, even ten times more gold
certificates than they had in their safe rooms.
173. Initially, it was abuse of trust and a sheer fraud on the part of the goldsmiths not
warranted by any norm of equity, justice and honesty. It was a form of forgery and
usurpation of the power of the sovereign authority to issue money. But overtime, this
fraudulent practice turned into the fashionable standard practice of the modern banks
under the "fractional reserve" system. How the money changers and bankers have
succeeded in legalizing the creation of money by the private banks, in spite of the strong
opposition from several rulers in England and USA, and how the Rothchilds acquired
financial mastery over the whole of Europe and the Rockfeller over the whole of America
is a long story, now lost in the mist of numerous theories developed to support the
concept of money-creation by the private banks. But the net result is that the modern
banks are creating money out of nothing. They are allowed to advance loans in the
amounts ten times more than their deposits. The coins and notes issued by the
government as a genuine and debt-free money have now a very insignificant proportion
in the total money in circulation, most of which is artificial money created by advances
made by the banks. The proportion of real money issued by the governments has been
constantly declining in most of the countries, while the proportion of the artificial money
created by the banks out of nothing is ever-increasing. The spiral of loans built upon
loans is now the major part of the money supply. Taking the example of UK according to
the statistics of 1997 the total money stock in the country was 680 billion pounds, out of
which only 25 billion pounds were issued by the government in the form of coins and
notes. All the rest i.e. 655 billion pounds were created by the banks. It means that the
original debt-free money remained only 3.6% of the whole money supply while 96.4% is
nothing but a bubble created by the banks. The way this bubble is growing annually can
be seen from the following table that details the quantum of money supply in UK during
twenty years:

63
 Total Coins and Notes TOTAL MONEY
Percentage of Real Debt-free
Year issued by the Govt. (M0) S. STOCK (M4) S.
Money to the Money Supply.
Pound billion Pound bln.
1977 8.1 65 12%
1979 10.5 87 12%
1981 12.1 116 10.5%
1983 12.8 161 7.9%
1985 14.1 205 6.8%
1987 15.5 269 5.8%
1989 17.2 372 4.6%
1991 18.6 485 3.8%
1993 20.0 525 3.8%
1995 22.4 585 3.8%
1997 25.0 680 3.6%
174. This table shows that the money created by the banks had been growing at a
galloping speed throughout the two decades until it reached 680 billion pounds in 1997.
The last column of the table shows the yearly declining percentage of the real money to
the total money supply which fell from 12% in 1977 to 3.6% in 1997.
175. This phenomenon unveils two realities. Firstly, it shows that 96.4% of the total
money supply is debt-ridden money and only 3.6% is debt-free. One can imagine how the
whole economy is drowned under debt. Secondly, it means that 96.4% of the aggregate
money circulated in the country is nothing but numbers created by computers, having no
real thing behind them.
176. The situation in USA is almost the same as that in U.K. Patrick S.J. Carmack and
Bill Still observe about it as follows:
"Why are we over our head in debt? Because we are laboring under a
debt-money system, in which all our money is created in parallel with an
equivalent quantity of debt, that is designed and controlled by private
bankers for their benefit. They create and loan money at interest, we get
the debt…
…So, although the banks do not create currency, they do create checkbook
money, or deposits, by making new loans. They even invest some of this
created money. In fact, over one trillion dollars of this privately-created
money has been used to purchase U.S. bonds on the open market, which
provides the banks with roughly 50 billion dollars in interest, less the
interest they pay some depositors. In this way, through fractional reserve
lending, banks create far in excess of 90% of the money, and therefore
cause over 90% of our inflation."
177. Although the conventional Quantity theory of money has suggested many devices to
control the money supply, including the control of interest rates by the government, these
remedies are not the cure of the disease. They are temporary measures and they
themselves have their own side effects that subject the economy with shocks of the
business cycle. Michael Rowbotham has rightly observed:

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 "This (monetary management) a government does by lowering or raising
interest rates. This alternately encourages or discourages borrowing,
thereby speeding up or slowing down the creation of money and the
growth of the economy.... The fact that, by this method, people and
businesses with outstanding debts can be suddenly hit with huge extra
charges on their debts, simply as a management device to deter other
borrowers, is an injustice quite lost in the almost religious conviction
surrounding this ideology…
…This method of controlling banks, inflation and money supply certainly
works; it works in the way that a sledge-hammer works at carving up a
roast chicken. An economy dependent upon borrowing to supply money,
strapped to a financial system in which both debt and the money supply
are logically bound to escalate, is punished for the borrowing it has been
forced to undertake. Many past borrowers are rendered bankrupt; homes
are repossessed, businesses are ruined and millions are thrown out of work
as the economy sinks into recession. Until inflation and overheating are no
longer deemed to be a danger, borrowing is discouraged and the economy
becomes a stagnating sea of human misery. Of course, no sooner has this
been done, than the problem is lack of demand, so we must reduce interest
rates and wait for the consumer confidence and the positive investment
climate to return. The business cycle begins all over again - There could
be no greater admission of the utter and total inadequacy of modern
economics to understand and regulate the financial system than through
this wholesale entrapment and subsequent bludgeoning of the entire
economy. It is a policy which courts illegality, as well as breaching
morality, in the cavalier way in which the financial contract of debt is
effectively rewritten at will, via the power of levying infinitely variable
interest charges."
178. Moreover, the baseless money created by the banks and financial institutions itself
has now become the subject of speculative trade through the derivatives in the form of
Futures and Options in the international markets. What it means is that in the beginning,
claims over money have been treated as money. Now, claims over claims are being
treated as such. According to an estimate, over 150 trillion US dollars worth of
derivatives are circulating in the world, whereas the combined GDP of all the 188
countries of the world is around 30 trillion US dollars only. Almost 80% of this trade is in
the hands of some two dozen big banks and hedge funds. The whole economy of the
world has thus been turned into a big balloon that is being inflated on daily basis by new
debts and new financial transactions having no nexus whatsoever with the real economy.
This big balloon is vulnerable to the market shocks and can be burst any time. It really
did several times in the recent past whereby the Asian Tigers reached the brink of total
collapse, and the effects of these shocks were felt in the whole world to the extent that the
media started crying that the market economy is breathing its last. Once again, we would
like to quote James Robertson, who in his excellent work 'Transforming Economic Life:
A Millennial Challenge" has commented on this aspect as follows:
"The money-must-grow imperative is ecologically destructive... (It) also
results in a massive world-wide diversion of effort away from providing

65
 useful goods and services, into making money out of money. At least 954b
of the billions of dollars transferred daily around the world are of purely
financial transactions, unlinked to transactions in the real economy.
People are increasingly experiencing the workings of the money, banking
and finance system as unreal, incomprehensible, unaccountable,
irresponsible, exploitative and out of control. Why should they lose their
houses and their jobs as a result of financial decisions taken in distant
parts of the world? Why should the national and international money and
finance system involve the systematic transfer of wealth from poor people
to rich people, and from poor countries to rich countries? Why someone in
Singapore be able to gamble on Tokyo Stock Exchange and bring about
the collapse of a bank in London? ... Why do young people trading in
derivatives in the City of London get annual bonuses larger than the whole
annual budgets of primary school ? Do we have to have a money and
financial system that works like this? Even the financier George Sores has
said ("Capital Crimes", Atlantic Monthly, January, 1997) that "the
untrammeled intensification of laissez-faire capitalism and the extension
of market values into all areas of life is endangering our open and
democratic society. The main enemy of the open society, I believe, is no
longer the Communist but the Capitalist Threat."
179. All this appalling situation faced by the whole world today is the logical outcome of
giving the interest-based financial system an unbridled power to reign the economy. Can
one still insist that the commercial interest is an innocent transaction? In fact the
universal horrors brought about by the commercial interest are far greater than the
individual usurious loans that used to affect only some individuals.

Interest and Indexation

180, Some appellants have tried to justify the interest charged and paid by the banks on
the ground that since the value of money is decreasing constantly, the interest should be
taken as a compensation for the erosion of the value of money during the period of
borrowing. The financier, according to them, should have a right to claim at least the
same amount in real terms as he had advanced to the borrower, but if his principal is
repaid to him in the same numerical terms, he will not receive the same purchasing power
as he had advanced to his debtor, because the inflation would have eroded a substantial
part of the real value of money. Therefore, they argue, the interest is paid to compensate
the loss the financier has suffered through inflation.
181. This argument is without force because the rates of interest are though a major cause
of inflation among other factors, they are not based on the rate of inflation. Had it been
compensation for inflation, the rate of interest should have always matched the rate of
inflation, and obviously this is not the case. The rates of interest are determined by the
demand and supply of money and not by the rate of inflation at the time of the contract. If
at any given time both rates match each other, it may be by chance and not as a matter of
principle. Therefore, the interest cannot be held as a compensation for the loss of
purchasing power.
182. Some other quarters have taken the aspect of inflation from another angle. They do
not claim that interest, as in vogue, is a compensation for the loss caused by inflation.

66
However, they suggest that indexation of loans can be a suitable substitute for the present
interest bearing loans. They argue that the financier should be compensated for the
erosion of the value of money he had advanced to the borrower and therefore he can
claim an additional amount matching the rate of inflation. Thus, according to them,
indexation may be introduced into the banking system as an alternative for interest.
183. But without going into the question whether indexation of loans are or are not in
conformity with Shar'iah, this suggestion is not practical so far as the banking
transactions are concerned. The reason is obvious. The concept of indexation of loans is
to give the real value of the principal to the financier based on the rate of inflation, and
therefore, there is no difference between depositors and borrowers in this respect. It
means that the bank will receive from its borrowers the same rate as it will have to pay to
its depositors, both being based on the same measure i.e. the rate of inflation. Thus
nothing will be left for the banks themselves, and no bank can be run without a profit.
Mr. Khalid M. Ishaq, advocate, who seemed to be inclined towards indexation, was asked
by the bench how the banking system can be established on the basis of indexation alone.
He frankly admitted that he had no ready answer, but the suggestion should be considered
in depth. Some bankers who appeared to assist the court, especially Mr. Abdul Jabbar
Khan, the former President of the National Bank of Pakistan, gave his absolute opinion
that the suggestion of taking indexation as a substitute of interest is not practicable from
banking point of view.
184. It is clear from this discussion that neither the present interest rates can be justified
on the basis of inflation, nor can indexation be used as a substitute for interest in the
present banking system.
185. However, the question of erosion of the value of money is certainly relevant to the
individual loans and unpaid debts. There are many cases where the creditors really face
hardships, especially where the value of the currency fell to an unimaginable extent, as
happened in Turkey, Syria, Lebanon and in the States of the former Soviet Union. In our
country too, the value of the rupee today is much less than it was before 1970. The
question is whether a person who has advanced a sum of Rs.1000/-before 1970 and the
debtor did not pay the principal till today is entitled to get the same Rs.1000/-, while this
amount has remained not more than Rs.100/- in real terms? This question is more severe
where the debtor did not pay despite his being able to pay.
186. In order to solve this problem, many suggestions have been proposed by different
quarters, some of which are the following:
a) That the loans should be indexed, meaning thereby, that the debtor must
pay an additional amount equal to the increase in the rate of inflation
during the period of borrowing.
b) That the loans should be tied up with gold, and it should be presumed
that the one who has loaned Rs.1000/- has actually loaned as much gold as
could be purchased on that date for Rs.1000/- and must repay as much
rupees as are sufficient to purchase that much of gold.
c) That the loans should be tied up by a hard currency like dollar.
d) That the loss of the value of money should be shared by both creditor
and lender in equal proportion. If the value of money has declined at a
ratio of 5%, 2.5% should be paid by the debtor and the rest should be
borne by the creditor, because the inflation is a phenomenon beyond the

67
 control of either of them. Being a common suffering, both should share it.
187. But we feel that this question needs a more thorough research which before its final
decision in this Court should first be initiated by different study circles of the country,
especially, by the Council of Islamic Ideology and the Commission for the Islamization
of Economy. Many international seminars have been held to deliberate on this issue. The
papers and resolutions of these seminars should be analyzed in depth.
188. On the other hand, having held that this question does neither justify interest nor
provides a substitute for it in the banking transactions, we do not have to resolve this
issue in this case, nor does the decision about the laws under challenge depend on it. We,
therefore, leave the question open for further study and research.

Mark-up and Interest

189. Some appellants have argued that although the interest is prohibited by the Holy
Qur'an and Sunnah, the present banks do not deal in interest. Instead, they charge mark-
up from their customers. Mr Haafiz S.A. Rahman, the learned counsel for the
Agricultural Development Bank of Pakistan gave a detailed history of the legal steps
taken by the government of Pakistan to eliminate interest from its economy. According to
him, effective 1 April 1998, all types of finance to all types of clients including
individuals were obligated to be designed on interest-free basis. On 1 July 1995 interest
bearing deposits ceased to be accepted and the deposits were ordered to be based on PLS
(profit and loss sharing) basis except the current accounts which do not attract any return.
In order to implement this directive, the State Bank of Pakistan allowed 12 modes of
financing, all free of interest, for the banks and financial institutions. The government has
also brought amendments to a large number of financial laws to eliminate interest from
the economy. After all these steps are taken, interest is no more applicable in the banking
transactions of the country. All the banks today are working under 12 modes of financing
announced by the State Bank of Pakistan. The appellants argued that since the interest
has already been abolished, the Respondents have no reason to pray for elimination of
interest.
190. The history given by Haafiz S.A. Rahman is essentially true and it is correct that the
State Bank of Pakistan had suggested 12 modes of financing instead of interest, but the
practical situation on the ground is that out of all these 12 modes only 2 or 3 modes are
normally being used by the banks and financial institutions, the foremost among them
being mark-up. But the way the mark-up is used by the banks today is nothing but a
change of nomenclature of the transaction. Practically what is being done is to replace the
name of interest by the name of mark-up. The concept of mark-up was originally
presented by the Council of Islamic Ideology in its report on the Elimination of Riba
submitted to the government of Pakistan in 1980. The Council has in fact suggested that
the true alternative to the interest is profit and loss sharing (PLS) based on Musharakah
and Mudarabah. However, there were some areas in which financing on the basis of
Musharakah and Mudarabah were not practicable. For these areas the Council has
suggested a technique usually known in the Islamic banks as Murabahah. According to
this technique the financier bank, instead of advancing a loan in the form of money,
purchases the commodity required by the customers from the market and then sells it to
the customer on deferred payment basis retaining a margin of mark-up (profit) added to
its cost. It was not a financing in its strict sense. It was rather a sale of a commodity

68
effected in favor of the client. The very concept of this transaction implies the following
points:
a) This type of transaction may be undertaken only where the client of a
bank wants to purchase a commodity. This type of transaction cannot be
effected in cases where the client wants to get funds for some purpose
other than purchasing a commodity, like overhead expenses, payment of
salaries, settlement of bills or other liabilities.
b) To make it a valid transaction it was necessary that the commodity is
really purchased by the bank and it comes into the ownership and
possession (physical or constructive) of the bank so that it may assume the
risk of the commodity so far as it remains under its ownership and
possession.
c) After acquiring the ownership and possession of the commodity it
should be sold to the customer through a valid sale.
d) The Council has also suggested that this device should be used to the
minimum extent only in cases where Musharakah or Mudarabah are not
practicable for one reason or another.
191. Unfortunately, while implementing this technique by the banks and the financial
institutions, all the above points were totally ignored. What was done was to change the
name of interest and replace it by the name of mark-up. The mark-up system as in vogue
today has no concern with any real commodity whatsoever. In most cases there is no
commodity at all in real sense; if there is any, it is never purchased by the banks nor sold
to the customers after acquiring it. In some cases this technique is applied on the basis of
buy-back arrangement which means that the commodity already owned by the customer
is sold by him to the bank and is simultaneously purchased by him from the bank at a
higher price which is nothing but to make fun of the original concept. In many cases it is
done merely on papers without a genuine commodity to be sold and purchased.
Moreover, this technique is applied indiscriminately to all the banking transactions
having no regard whether or not they involve a commodity. The procedure is being
applied to all types of finances including financing overhead expenses, payment of bills
etc. The net result is that no meaningful change has ever been brought about to the
system of interest on the assets side of the banks. Therefore, all the objections against
interest are very much applicable to the mark-up system as in vogue in Pakistan and this
system cannot be held as immune from being declared as repugnant to the Holy Qur'an
and Sunnah. We hold accordingly.

Qarz and Qiraz

192. Dr. M. Aslam Khaki, the appellant in Shariat Appeal No.l (S) 1992 was not a party
to the proceedings in the Federal Shariat Court in these cases. However, the matter being
of general importance we heard him at length. In the memo of his appeal he had adopted
almost the same lines of argument as we have already dealt with but while appearing in
the court his arguments were on totally different lines. He expressed his opinion that if
the financing transaction stipulates a fixed return to the financier regardless of whether
the financed party has gained a profit or suffered a loss, it should be regarded as riba. But
if the financing transaction contemplates that in the case of a loss, the loss will be shared
by both the parties in proportion to their respective investments, this much is enough to

69
validate the transaction after which the parties can agree on a condition that if the
business gains a profit a certain rate of profit attributable to the original investment of the
financier will be deserved by him. It will become a transaction of Qiraz which is not
impermissible in Shar'iah.
193. At the first place, this standpoint does not save the laws under consideration from
the attack of the Respondents because these laws ensure a fixed return to the financier in
any case, therefore, his appeal, to save the said laws from being declared as repugnant to
the injunctions of Islam, is misconceived. His standpoint can be considered only in the
context of finding out alternatives to the interest in our banking system. But his view is
not supported by the Holy Qur'an and Sunnah, nor by any jurist throughout the fourteen
centuries. Qiraz is a term used in the literature of the Islamic Fiqh as a synonym to
Mudarabah and all the schools of Islamic Fiqh are unanimous on the point that in an
agreement of Mudarabah no rate of profit attributable to the investment can be allocated
for the financier. Any such arrangement has been held by the jurists as impermissible.
The standpoint of the appellant is contradictory in itself because he admits that in the case
of loss, the financier does not deserve any profit but on the other hand if the financier has
stipulated 10% of his investment as his share in the profit of the business, it is acceptable
to the appellant. But what will happen if the whole profit is not more than 10%. In this
case the whole profit according to him will be secured by the financier and the Mudarib
will get nothing, despite the business having earned a profit. This view is, therefore,
fallacious on the face of it.

Riba and Doctrine of Necessity

194. Lastly, some appellants have tried to attract the doctrine of necessity to the case of
riba. Mr. Siddiq AlFarooq, the Managing Director of House Building Finance
Corporation (HBFC) argued that the Holy Qur'an has allowed even to eat pork in the case
of extreme hunger to save one's life. The argument of some appellant was that the
interest-based system has now become a universal necessity and no country can live
without it. Interest is no doubt prohibited by the Holy Qur'an but to implement this
prohibition on countrywide level may be a suicidal act which may shatter the whole
economy, therefore, it should not be declared as repugnant to the injunctions of Islam.
Some appellants have argued that the whole world today is turning into a global village
and no country can survive in seclusion, especially, our country which is drowned in
debts and its most development projects depend chiefly on the foreign loans based on
interest. Once the prohibition of interest is enforced at a whole-sale basis all the
development projects will breath their last and the whole economy will face a sudden
collapse.
195. We have given due attention to this line of argument and examined this aspect
seriously with the assistance of a number of economists, bankers and professional
practitioners. No doubt, Islam is a realistic religion and it never binds an individual or a
State with a command, the implementation of which is beyond its control. The doctrine of
necessity is one of the doctrines enshrined and developed by the Holy Qur'an and Sunnah
and expounded by the Muslim jurists. It is rightly pointed out by Mr. Siddiq AlFarooq
that the Holy Qur'an has allowed even to eat pork in a case of extreme hunger where the
life of a human being cannot be saved without it. But the doctrine of necessity in Islam is
not an obscure concept. There are certain criteria expounded by the Muslim jurists in the

70
light of the Holy Qur'an and Sunnah to determine the magnitude of necessity and the
extent to which a Qur'anic command can be relaxed on the basis of an emergent situation.
Therefore, before deciding an issue on the basis of necessity one must make sure that the
necessity is real and not exaggerated by imaginary apprehensions and that the necessity
cannot be met with by any other means than committing an impermissible act. When we
analyze the case of interest in the light of the above principles we are of the firm view
that there is a great deal of exaggeration in the apprehension that the elimination of
interest will lead the economy to collapse. For a realistic analysis we will have to
consider the domestic transactions and the foreign transactions separately.

Domestic Transactions
196. In the domestic transactions the apprehension against the elimination of interest is
often based on some misconceptions. There are many people who think that abolishing
interest means to turn the banks into charitable institutions and that the banks, in an
Islamic system, will advance money with no return and the depositors will get nothing on
their money held in the banks. Obviously, this misconception is based on sheer ignorance
of the Islamic principles. We have already discussed at length the concept of a Loan in
Islam and that its role in the commercial economy is very limited. What is meant by
Islamizing the banks and financial institutions is not to advance money without return;
what it does mean is that the banks will finance on the basis of profit and loss sharing,
and other Islamic modes of financing, none of which is devoid of return.
197. Some other people are of the view that the alternative banking system based on
Islamic principles has not yet been designed nor practiced, and therefore, by
implementing it abruptly we will enter into a dark and obscure area and subject ourselves
to unseen dangers that may bring total disaster to our economy.
198. This apprehension is also based on unawareness of the new thoughts about the
present financial system and about what has been happening in the field of Islamic
banking for the last three decades. The fact is that Islamic banking is no longer a fanciful
or utopian dream. Muslim jurists and economists have been working on various aspects
of Islamic banking from different dimensions for the last 50 years, and it is from the
1970s that the concept of Islamic banks has been translated into real institutions working
on the Islamic lines. The number of Islamic banks and financial institutions throughout
the world has been growing during the last 3 decades. As stated by Mr. Iqbal Ahmad
Khan, the head of the Islamic banking division of HSBC London who appeared in this
case as a juris-consult, the number of Islamic banks and financial institutions has now
reached more than 200 across 65 countries of the world with US $90 billion capital at a
growth rate of 15% p.a. By the year 2000 the Islamic Finance Industry is expected to be a
US $100 billion plus business.
199. The present Islamic Development Bank (IDB) based in Jeddah was established in
1975 by the Organization of Islamic Conference (OIC) as a pioneer of Islamic banking.
This bank was originally meant for inter-governmental financial transactions providing
funds for development projects in the member countries. But it is now providing trade
finance facilities to the private sector also. This bank has its own research center working
on different issues of Islamic banking and economy. The Court invited this bank to send
some of its experts to assist the Court and to throw light on the working of the Islamic
banks and the feasibility of the proposals presented so far for transforming the banking

71
system to the Islamic ways of financing. The bank was kind enough to send a high level
delegation headed by the President of the Bank Dr. Ahmad Muhammad Afi himself.
Several members of the delegation, including the President of the Bank, addressed the
Court and have submitted their report in writing. Details apart, the substance of their
submissions is summarized in their own words as follows:
"The experience accumulated by Islamic banks, in general, and the Islamic
Development Bank in particular, as well as attempts made in a number of
Muslim countries to apply an Islamic financial system, indicate that the
application of such an Islamic system by any Muslim country, at the
national level, is feasible. According to the data compiled by the
International Union of Islamic Banks, there are 176 Islamic banks and
institutions in the world. In terms of number, 47% of these institutions are
concentrated in South and south East Asia, 27% in GCC and Middle East,
20% in Africa and 6% in the Western countries. In terms of deposits,
amounting to US $112.6 billion and total assets amounting to US $147.7
billion. 73% of the activities of these institutions are concentrated in the
GCC and the Middle East. IDB alone, since its inception from 1976 to
1999, has provided financing in the range of US $21.0 billion. As against a
growth rate of 7% per annum recorded by the global financial services
industry, Islamic banking is growing at a rate of 10-15% per annum and
accounts for 50-60% of the share of the market in the GCC and Middle
East."
"Islamic banking is distinctive in two respects: concentrating on the real
sector of the economy, it imparts tremendous stability to the economic
system by achieving an identity between monetary flows and goods and
services, and by operating on a system of profit and loss sharing in its
evolved state, it insulates the society from the debt-mountain on the
analogy that if the economies enter into recessionary or deflationary
phases, the principles of profit and loss sharing protects the states and
economic operators from the evils of accumulation of interest and
minimizes defaults and bankruptcies."
200. Since the experience of Islamic banking is passing through its initial phase, the
industry is facing numerous issues. These issues have given birth to a number of research
institutes, study circles, training programs and specialized groups. There is a large
number of seminars, workshops and conferences, held every year in different parts of the
world where the Muslim jurists, economists, bankers and practitioners sort out the
practical problems and find out their solutions.
201. This does never mean that the Islamic banking industry has achieved the ultimate
goal of its maturity. It certainly has its limitations. It may be suffering from a number of
weaknesses. There are many issues yet to be resolved. But the progress made by the
Islamic banks so far is sufficient to refute the misconception that it is a utopian idea, or
that any advance in this direction will make us step into a void. This brief account does at
least show that much of the ground work has been done in the field of Islamic banking,
and while discussing the possibilities of the elimination of interest from the economy, this
background cannot be ignored or undervalued.
202. Mr. M. Ashraf Janjua, the Chief Economic Advisor of the State Bank of Pakistan,

72
has been nominated by the SEP as its representative during the hearing of this case. In his
written statement submitted to the Court he has opined that shifting of the entire interest-
based system to one that is free from interest is feasible, but it is a more complex and
challenging task than the one undertaken by the private Islamic banks working in
different part of the world.
203. We are not unconscious of the fact that elimination of interest from the entire
economy is more complex and challenging in many respects than abolishing it from a
single institution. But at the same time, there are many areas where establishing an
interest-free system is much easier for the government than it was for the private Islamic
banks. The Islamic banks working in different parts of the world do not enjoy any support
from their respective governments or the central banks for their interest-free transactions.
They have to submit to the legal framework and the regulatory requirements that are
basically designed for interest-based financing, but are imposed on the Islamic banks
with the same force without the slightest change in favor of Islamic modes of financing.
The Islamic banks are working with their hands tied by the conventional laws and
regulations. If the interest-free system is introduced by the government itself at country
level, the government will be free to bring its own legal and regulatory framework and
the difficulties faced by the private Islamic banks will create no problem for the
government. Moreover, the Islamic banks have to compete with the conventional banks.
Any client not happy with the arrangement offered by the Islamic banks can easily go to a
conventional bank, the other alternative being readily available. If the Islamic modes are
enforced at country level, and no bank offers an interest-based arrangement, this problem
can easily be overcome. The correct position, therefore, is that abolishing interest at
country level is easier in some respects and more difficult in some others. To be realistic,
we should realize both aspects while determining the time frame for conversion. Let us
now examine the main features of the proposed system of Islamic banking.

Profit and Loss Sharing

204. The basic and foremost characteristic of Islamic financing is that, instead of a fixed
rate of interest, it is based on profit and loss sharing. We have already discussed the
horrible results produced by the debt-based economy. Realizing the evils brought by this
system, many economists, even of the Western world are now advocating in favor of an
equity-based financial arrangement. To quote James Robertson again:
"Why has the process of issuing new money into economy (i.e. credit
creation) been delegated by governments to the banks, allowing them to
profit from issuing it in the form of interest-bearing loans to their
customers? Should governments not issue it directly themselves, as a
component of a citizen's income?"
"Would it be desirable and possible to limit the role of interest more
drastically than that, for example by converting debt into equity
throughout the economy? This would be in line with Islamic teaching, and
with earlier Christian teaching, that usury is sin. Although the practical
complications would make this a goal for the longer term, there are strong
arguments for exploring it - the extent to which economic life world-wide
now depends on ever-rising debt, the danger of economic collapse this
entails, and the economic power now enjoyed by those who make money

73
 out of money rather than out of risk-bearing participation in useful
enterprises."
205. John Tomlinson is an Oxford based Canadian economist. Having studied the effect
of debt on the economies of developed and less developed countries, he set up and is the
Chairman of Oxford Research and Development Corporation Limited which explores the
use of equity instruments and the development of equity markets for areas of finance
currently served by debt. In his book "Honest Money" he has strongly recommended the
conversion of debt into equity. His following conclusions merit consideration for those
who are adamant on maintaining status quo in the financial system:
"Converting debt to equity is not a panacea for all economic ills. It can,
however, produce many positive benefits. These benefits will not
necessarily follow automatically from conversion. Concentrated effort will
be required to ensure they do. Without conversion they will not happen at
all.
Not the least of these benefits will be those brought to the banking
community itself. The banking and monetary system will not collapse. Nor
should there ever need to be the threat of collapse again. Owners of banks
will find the value of their shares underpinned as liabilities disappear from
balance sheets and are replaced by assets of a specific value. Each and
every depositor will be able simultaneously to withdraw his or her total
deposits.
Demand for the bank's current or cheque account services will not
diminish. Longer term depositors will now have to pay for storage: it will
be a less attractive option than exchange, so the velocity with which
money moves from bank to market-place to bank again, from one account
to another, is likely to increase. There will be a continuous flow of money
available for new equity investment.
The market-place in general will also receive benefits. Conversion will
also cause the value of money to stabilize. Savings can then retain their
value. Prices need only vary according to the supply and demand of the
product being priced. Measurements of exchange value made by different
people at different times can be validly compared. The unit of money will
once more be a valid unit of measurement of exchange value. The field of
economics can become a science.
Many of the distortions which now exist in our individual frames of
reference will be corrected. For instance, an investment which took an
investor, ten, fifteen or twenty years to recoup used to be considered
sound. Now, too often the maximum period envisaged is five years; even
three. This short-term view has precluded many useful businesses from
being created. The re-establishment of stable money and the emphasis on
security which will be required within equity investment program will
encourage people to take a longer view. More businesses will then be
considered viable and the number of new jobs can increase dramatically.
Existing savers will also be protected. The conversion to equity will
eliminate the possibility of collapse for individual banks and for the
system as a whole. Savings will not disappear. The nature of savings will

74
 change from just units of money to units of money and shares. The
exchange value of both the shares and the money will have to be re-
assessed. But they will have value. If no actions is taken and the system
collapses, they may end up having no value.
The changes proposed will also free many from the enslavement of debt.
Both nations and individuals can regain their dignity. They will be free to
make their own choices. No longer will managers have to face the choice
between paying interest and disemploying some or not paying interest and
disemploying all.
Nor shall we need to experience the stresses caused by current economic
and business cycles. There will be a steady flow of money into
investments. New investment opportunities will continually be sought as a
home for both individual saving and business profits. Both will wish to
avoid storage charges.
Growth will be dependent upon the continuing development of new ideas
and new productive capacity. Growth will no longer be dependent upon
the creation of new debt. Economic expansion will depend upon the
positive flow of new savings and new profits.
Re-establishing the integrity of money will eliminate at least one of the
causes of human conflict. Money will no longer secretly steal from those
who save, those on fixed income and those who enter long-term contracts.
Further, it can lead to a greater premium being placed on personal
integrity. The character traits of honest, honorable and forthright behavior
will be in demand. Investors' security will depend on them. Recognition of
the degree of interdependence in an equity-oriented market-place can lead
to more consideration of the needs of others, and, ultimately, to a more
caring and, compassionate society.
Of course, life is never roses all the way. Many mistakes will be made.
When new paths are trodden, the way is sometimes uncertain. Some will
find it difficult to break the habitual patterns of thought which govern
behavior in a debt-oriented society. No doubt some readers will have
already experienced this.
Some will be hard-pressed when the actual exchange value of their
investments becomes apparent. Yet, the conversion process can be
controlled. Collapse cannot. We should be able, as part of the conversion
process, to identify those who might suffer unduly. Then we can be
prepared to assist them and cushion any hardship. The case of honest
money is a compelling one. Honest money is not a thief. It does not steal
from the thrifty. It is not socially divisive. It does not promote economic
and business cycles, creating unemployment. On the contrary, it
encourages thrift. It promotes sustainable economic growth. It rewards
merit. It demands integrity. These were worthwhile goals. They can be
achieved. What is needed now is the will to make them happen."
206. Michael Rowbotham has commented on the above-quoted book of Tomlinson as
follows:
"One of the most unusual and original contributions to the monetary

75
 debate. John Tomlinson is a former merchant banker and presents a
powerful case against the debt-based money system; his solution is highly
creative and shows the scope for thought outside the normal parameters of
monetary reform. The work is currently being incorporated by Nova
University in America as part of their master degree in economics."
207. Philip Moore, in his recent study of Islamic Finance, observes as follows:
"Although this long term shift from a bond-based to an equity-based
financial system accords in many respects with Islamic economic
principles, it is a trend which is by no means confined to the Islamic world
and which is increasingly being championed globally. The resurgence in
Islamic finance worldwide is seen by some simply as a reflection of the
global economy's discernible transition from bond-based to equity-based
finance.
Consider, for example, the strategy of a developed, non-Muslim but
heavily indebted economy such as Italy. Under the terms of privatization
programme which gathered momentum in 1995 and 1996, Italian law
stipulates that ".....all the proceeds of the privatization of public companies
become part of a sinking fund that, by law, can only be used to retire debt,
and is not applied towards the reduction of the PSBR." Perhaps, indeed,
the Western world has been gravitating towards Islamic principles of
finance without knowing it over the last three decades."
208. Mr. Abbes Mirakhor and Mohsin H. Khan, both economists of the Research
Department of the International Monetary Fund (IMF) have studied in detail the
implications of an interest-free Islamic banking, and while discussing the profit and loss
system they have observed:
"As shown in a recent paper by Khan (1985) this system of investment
deposits is quite closely related to proposals aimed at transforming the
traditional banking system to an equity basis made frequently in a number
of countries, including the United States."
Peter Warburton has also preferred an equity-based financial system and has discussed
the theories of Fisher, Minsky, J. Presley and P. Mills in this respect.
209. Thus, the equity-based banking is not something proposed by the Islamic circles
alone. It is being suggested also by some non-Muslim economists on purely economic
grounds. The injustice, instability and business shocks created by the present debt-based
financial system have themselves compelled them to think about an equity-based system
that has more potential to bring about distributive justice and stability. In equity-based
banking the depositors are expected to gain much more than they are receiving today in
the form of interest which often becomes negative in real terms by the inflation caused
mainly by the expansion of the debt-based money. It will divert the flow of wealth
towards the common people and in turn will encourage savings and bring a gradual and
balanced prosperity.

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Some Objections on Musharakah Financing
1. Risk of Loss
210. It is argued that the arrangement of Musharakah is more likely to pass on losses of
the business to the financier bank or institution. This loss will be passed on to depositors
also. The depositors, being constantly exposed to the risk of loss, will not like to deposit
their money in the banks and financial institutions and thus their savings will either
remain idle or will be used in transactions outside the banking channels, which will not
contribute to the economic development at national level.
211. This argument is, however, misconceived. Before financing on the basis of
Musharakah, the banks and financial institution will study the feasibility of the proposed
business for which funds are needed. Even in the present system of interest-based loans
the banks do not advance loans to each and every applicant. They study not only the
financial position of the client, but in some cases they have to examine the potentials of
the business and if they apprehend that the business is not profitable, they refuse to
advance a loan. In the case of Musharakah, they will have to carry out this study at a
wider scale with more depth and precaution, but this extra work will certainly contribute
a lot to the betterment of the economy as a whole.
212. Moreover, no bank or financial institution can restrict itself to a single Musharakah.
There will always be a diversified portfolio of Musharakah. If a bank has financed 100 of
its clients on the basis of Musharakah, after studying the feasibility of the proposal of
each one of them, it is hardly conceivable that all of these Musharakahs, or the majority
of them will result in a loss. After taking proper measures and due care, what can happen
at the most is that some of them make a loss. But on the other hand, the profitable
Musharakahs are expected to give more return than the interest-based loans, because the
actual profit is supposed to be distributed between the client and the bank. Therefore, the
Musharakah portfolio, as a whole, is not expected to suffer loss, and the possibility of
loss to the whole portfolio is merely a theoretical possibility which should not discourage
the depositors. This theoretical possibility of loss in a financial institution is much less
than the possibility of loss in a joint stock company whose business is restricted to a
limited sector of commercial activities. Still, the people purchase its shares and the
possibility of loss does not refrain them from investing in these shares. The case of the
bank and financial institutions is much stronger, because their Musharakah activities will
be so diversified that any possible loss in one Musharakah is expected to be more than
compensated by the profits earned in other Musherakahs. The experience of Pakistani
banks is an empirical evidence. Since 1 July 1995 all the deposits in Pakistan are based
on profit and loss sharing basis, except current account. No guarantee even of the
principal, is provided to the depositors by the banks, and thus the liabilities side of our
present banks is fully equity-based. Still, the deposits are being made as before.
213. Apart from this, an Islamic economy must create a mentality which believes that any
profit earned on money is the reward of bearing risks of the business. This risk may be
minimized through expertise and diversifying the portfolio where it may become a
hypothetical or theoretical risk only. But there is no way to eliminate this risk totally. The
one who wants to earn profit, must accept this minimal risk. Since this understanding is
already there in the case of normal joint stock companies, nobody has ever raised the
objection that the money of the shareholders is exposed to loss. The problem is created by
the system that separates the banking and financing from the normal trade activities, and

77
which has compelled the people to believe that banks and financial institutions deal in
money and papers only, and that they have nothing to do with the actual results emerging
in trade and industry. It is this basic premise on the basis of which it is argued that they
deserve a fixed return in any case. This essential separation of financing sector from the
sector of trade and industry has brought great harms to the economy at macro-level.
Obviously, when we speak of Islamic banking, we never mean that it will follow this
conventional system in each and every respect. Islam has its own values and principles
which do not believe in separation of financing from trade and industry. Once this
Islamic system is understood, the people will invest in the financing sector, despite the
theoretical risk of loss, more readily than they invest in the profitable joint stock
companies.

2. Dishonesty
214. Another apprehension against Musharakah financing is that the dishonest clients
may exploit the instrument of Musharakah by not paying any return to the financiers.
They can always show that the business did not earn any profit. Indeed, they can claim
that it has suffered a loss in which case not only the profit, but also the principal amount
will be jeopardized.
215. It is, no doubt, a valid apprehension, especially in societies where corruption is the
order of the day. However, solution to this problem is not as difficult as is generally
believed or exaggerated.
216. If all the banks in a country are run on pure Islamic pattern with a careful support
from the Central Bank and the government, the problem of dishonesty is not hard to
overcome. First of all, the system of credit rating will have to be implemented with full
force. Every company or corporate body should be compelled by law to subject itself to
an independent credit rating. Even the big firms seeking finance above a certain level
may also be subjected to the same rule. Secondly, a well-designed system of auditing
should be implemented whereby the accounts of all the clients are fully maintained and
properly controlled. According to some contemporary scholars, profits may be calculated
on the basis of gross margins only. It will reduce the possibility of disputes and
misappropriation. However, if any misconduct, dishonesty or negligence is established
against a client, he will be subjected to punitive steps, and may be deprived of availing
any facility from any bank in the country, at least for a specific period.
217. These steps will serve as strong deterrent against concealing the actual profits or
committing any other act of dishonesty. Otherwise also, the clients of the banks cannot
afford to show artificial losses constantly, because it will be against their own interest in
many respects. It is true that even after taking all such precautions, there will remain a
possibility of some cases where dishonest clients may succeed in their evil designs, but
the punitive steps and the general atmosphere of the business will gradually reduce the
number of such cases. (Even in an interest-based economy, the defaulters have always
been creating the problem of bad debts). But it should not be taken as a justification, or as
an excuse, for rejecting the whole system of Musharakah.

Mudarabahah Transaction
218. Moreover, Islamic banking is not restricted to profit and loss sharing. Though
Musharakah is the ideal mode of financing that fully conforms, not only to the principles

78
of Islamic jurisprudence, but also to the basic philosophy of an Islamic economy, yet
there is a variety of instruments that may be used on the assets side of the bank, like
Murabahah, leasing, salam, istisna, etc. Some of these models are less risky and may be
adopted where Musharakah has abnormal risks or is not applicable to a particular
transaction. Some of the appellants have complained that the Federal Shariat Court, in its
impugned judgment, has declared the mark-up system, too, as against the injunctions of
Islam. It means that Murabahah cannot be used by an Islamic bank as a permissible mode
of financing.
219. This complaint is misconceived. The Federal Shariat Court has not held the
Murabahah transaction as invalid in principle. It has rather suggested Murabahah for
financing exports in para 367 of its judgment. However, the Court has held the "mark-up
system as in vogue" to be against the Islamic injunctions and has expressed its
apprehension that this mode will be subject to misuse and, applied without fulfilling the
necessary conditions on a large scale basis, it will bring little difference to the present
system. We have already observed that the "mark-up system as in vogue in Pakistan" is
not a Murabahah transaction in the least. It is merely a change of name. The purported
sale of goods never takes place in real terms. If Murabahah is effected with all its
necessary conditions, it is not impermissible in Shar'iah, nor has the Federal Court
declared it as an absolutely impermissible transaction per se. We have already mentioned
above while describing the background of the objection of the infidels against the
prohibition of riba that "sale is similar to riba" (in paras 50 and 51 of this judgment) that
they used to sell a commodity on deferred payment for a higher price. Their objection
was that when they increase the price at the initial stage of sale, it has not been held as
prohibited but when the purchaser fails to pay on the due date, and they claim an
additional amount for giving him more time, it is termed as "riba" and haram. The Holy
Qur'an answered this objection by saying: "Allah has allowed sale and forbidden riba."
As explained earlier (in para 190 of this judgment) Murabahah is a sale and not a
financing in its origin. It must, therefore, conform to all the basic standards of a sale. It
may be used only where the client of the bank really wants to purchase a commodity. The
bank must purchase it from the original supplier and after taking into its ownership and
(physical or constructive) possession sells it to the client. All these elements must be
visibly present in a valid Murabahah with all their legal and logical consequences,
including in particular, that the bank must assume the risk of the commodity so long as it
remains in its ownership and possession. This is the basic feature of the Murabahah
which makes it distinct from an interest-based financing and once it is ignored, though
for the purpose of simplicity, the whole transaction steps into the prohibited field of
interest-based financing.
220. An objection frequently raised against a Murabahah transaction is that when used as
a mode of financing it contemplates an increased price based on the deferred payment. It
means that the price of commodity in a Murabahah transaction is more than the price of
the same commodity in spot market. Since the price is increased against the time given to
the purchaser, it resembles the interest-based loan transaction.
221. We have already explained in para 136 to 140 of this judgment that Islam has treated
money and commodity differently. Having different characteristics both are subject to
different rules and principles. Since money has no intrinsic utility, but is only a medium
of exchange which has no different qualities, the exchange of a unit of money for another

79
unit of the same denomination cannot be effected except at par value. If a currency note
of Rs.1000/= is exchanged for another note of Pakistani rupees, it must be of the value of
R.1000/= . The price of the former note can neither be increased nor decreased from
Rs.1000/= even in a spot transaction, because the currency note has no intrinsic utility nor
a different quality (recognized legally), therefore, any excess on either side is without
consideration, hence, not allowed in Shar'iah. As this is true in a spot exchange
transaction, it is also true in a credit transaction where there is money on both sides,
because if some excess is claimed in a credit transaction (where money is exchanged for
money) it will be against nothing but time.
222. The case of normal commodities is different. Since they have intrinsic utility and
have different qualities, the owner is at liberty to sell them at whatever price he wants,
subject to the forces of supply and demand. If the seller does not commit a fraud or
misrepresentation, he can sell a commodity at a price higher than the market rate with the
consent of the purchaser. If the purchaser accepts to buy it at that increased price, the
excess charged from him is quite permissible for the seller. When the seller can sell his
commodity at a higher price in a cash transaction, he can also charge a higher price in a
credit sale, subject only to the condition that he neither deceives the purchaser, nor
compels him to purchase, and the buyer agrees to pay the price with his free will.
223. It is sometimes argued that the increase of price in a cash transaction is not based on
the deferred payment, therefore, it is permissible while in a sale based on deferred
payment, the increase is purely against time which makes it analogous to interest. This
argument is again based on the misconception that whenever price is increased, taking the
time of payment into consideration, the transaction comes within the definition of
interest. This presumption is not correct. Any excess amount charged against late
payment is riba only where the subject matter is money on both sides. But if a
commodity is sold in exchange of money, the seller, when fixing the price, may take into
consideration different factors, including the time of payment. A seller, being the owner
of a commodity which has intrinsic utility may charge a higher price and the purchaser
may agree to pay it due to various reasons for example:
(a) His shop is nearer to the buyer who does not want to go to the market
which is not so near.
(b) The seller is more trust-worthy for the purchaser than others, and the
purchaser has more confidence in him that he will give him the required
thing without any defect.
(c) The seller gives him priority in selling commodities having more
demand.
(d) The atmosphere of the shop of the seller is cleaner and more
comfortable than other shops.
(e) The seller is more courteous in his dealings than others.
224. These and similar other consideration play their role in charging a higher price from
the customer. In the same way, if a seller increases the price because he allows credit to
his client, it is not prohibited by Shar'iah if there is no cheating and the purchaser accepts
it with open eyes, because whatever the reason of increase, the whole price is against a
commodity and not against money. It is true that while increasing the price of the
commodity, the seller has kept in view the time of its payment but once the price is fixed,
it relates to the commodity, and not to the time, the price will remain the same and can

80
never be increased by the seller. Had it been against time, it might have been increased, if
the seller allows him more time after the maturity.
225. To put it another way, since money can only be traded in at par value, as explained
earlier, any excess claimed in a credit transaction (of money in exchange of money ) is
against nothing but time. That is why if the debtor is allowed more time at maturity, some
more money is claimed from him. Conversely, in a credit sale of a commodity, time is
not the exclusive consideration while fixing the price. The price is fixed for commodity,
not for time. However, time may act as an ancillary factor to determine the price of the
commodity, like any other factor from those mentioned above, but once this factor has
played its role, every part of the price is attributed to the commodity.
226. The upshot of this discussion is that when money is exchanged for money, no excess
is allowed, neither in cash transaction, nor in credit, but where a commodity is sold for
money, the price agreed upon by the parties may be higher than the market price, both in
cash and credit transactions. Time of payment may act as an ancillary factor to determine
the price of a commodity, but it cannot act as an exclusive basis for and the whole
consideration of an excess claimed in exchange of money for money.
227. This position is accepted unanimously by all the four schools of Islamic law and the
majority of the Muslim jurists. This is the correct legal position of Murabahah transaction
according to Shar'iah. However, two points must be remembered:
a) The Murabahah when used as a mode of trade financing is borderline
transaction with very fine lines of distinction as compared to an interest
bearing loan. These fine lines of distinction can be observed only when all
the basic requirements already explained are fully complied with. To
ignore any one of them makes it an interest-bearing financing, therefore, it
should always be effected with due care and precaution.
b) Notwithstanding the permissibility of the Murabahah transaction, it is
susceptible to misuse and keeping in view the basic philosophy of an
Islamic financial system it is not an ideal way of financing. Hence it
should be used only where the Musharakah and Mudarabah are not
applicable.
228. Apart from Musharakah and Mudarabah there are other modes of financing like Ijara
(Leasing), Salam and Istisna that can be used in different types of financing. We need not
go into the details of these because they are elaborated in different reports submitted to
the government for the elimination of Interest. The first comprehensive report in this
respect was submitted by the Council of Islamic Ideology in 1980. The second report was
that of the Commission for Islamization of Economy, constituted under the Shariat Act.
This Commission has submitted its comprehensive report to the government in 1991.
Lastly, the same Commission was reconstituted under the Chairmanship of Raja Zafarul
Haq which submitted its final report in August 1997. We have gone through all these
reports and without commenting on each and every detail proposed in them we are
satisfied that all these reports can at least be taken as the basic ground work for bringing
about the change in our present financial system.
229. The upshot of this discussion is that the Doctrine of Necessity cannot be applied to
protect the present interest based system for ever or for an indefinite period. However,
this doctrine can be availed of for allowing a reasonable time to the government
necessarily required for the switch-over to an interest-free Islamic financial system.

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The Loans of the Government
230. One major difficulty in the process of elimination of Interest is felt to be the
borrowings of the Government. At present the government of Pakistan is heavily
indebted to domestic and foreign lenders. So far as the domestic loans are concerned,
their conversion to Islamic modes of financing has been discussed in detail in all the
reports referred to above. Dr. Waqar Masood Khan, Vice president of International
Islamic University, Islamabad, appearing as a juris-consult in this case, has also discussed
the magnitude of the problem and has thoroughly examined the ramifications of
elimination of Interest from this sector. In his statement submitted to the Court he has
discussed this issue from page 29 to 49. The substance of the alternative suggestions is
that all the borrowings of the government from domestic sources should be designed on
the basis of project-related financing. This will, in addition to being compatible with
Shar'iah, help curbing the corruption and misappropriation of borrowed funds. After
examining all this material we are of the view that in this sector too, the interest cannot be
taken as a necessity to continue for an indefinite period. However, this area may justify
some more time for transformation than the private banking transactions will require.

Foreign Loans
231. Although the laws under challenge in the present case are not specifically related to
the foreign borrowings, yet it is obvious that once the interest is held illegal, these
transactions will also be hit by the prohibition in some way or the other. This seems to be
the most difficult area where the prohibition of interest is required to be implemented.
The government's foreign loans as of 1 March 1999 stand at $31.15 billion or Rs.1610
billion at the current interbank rate. It is argued that conversion of this type of borrowing
to an interest-free basis is almost impossible.
232. Before we touch upon the Islamic solution to this problem we would like to observe
that the speed at which our foreign borrowings are increasing merits serious
consideration. In the beginning we started borrowing funds from international sources for
our development projects. Later the scope of foreign borrowing was extended even to the
non-development expenses. Thereafter huge amounts were borrowed for debt servicing
and now these borrowings are meant to pay interest to the international lenders.
233. It needs no expertise in economics to realize that this is an alarming situation which
is leading constantly towards the slavery of the whole nation in the hands of our lenders.
We are mortgaging the future of our present and coming generations by incurring huge
debts every year. The notion that the foreign borrowings help the developing countries in
their development projects and assist in attaining prosperity is now proved to be false in
the case of a large number of the "third world" countries. This fact is increasingly
realized by the independent economists. Susan George, an American economist living in
France has written widely on development and world issues. She is an Associate Director
of the Transnational Institute in Amsterdam and her books on the Third World debt have
been widely admired, some of which have won international awards. She has summarized
the eye-opening results of the Third World debt in the following words:
"According to the OECD, between 1982 and 1990, total resource flows to
developing countries amounted to $927 billion. This sum includes the
OECD categories of Official Development Finance, Export Credits and
Private Flows - in other words, all official bilateral and multilateral aid,

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 grants by private charities, trade credits plus direct private investment and
bank loans. Much of this inflow was not in the form of grants but was
rather new debt, on which dividends or interest will naturally come due in
future.
During the same 1982-90 period, developing countries remitted in debt
service alone 1342 billion (interest and principal) to the creditor countries.
For a true picture of resource flows, one would have to add many other
South-to-North out-flows, such as royalties, dividends, repatriated profits,
underpaid raw materials and the like. The income-outflow difference
between $1345 and $927 billion is thus a much understated $418 billion in
the rich countries' favor. For purposes of comparison, the US Marshall
Plan transferred $14 billion 1948 dollars to war-ravaged Europe, about
$70 billion in 1991 dollars. Thus in the eight years from 1982-90 the poor
have financed six Marshall Plans for the rich through debt service alone.
Have these extraordinary outflows at least served to reduce the absolute
size of the debt burden? Unfortunately not. In spite of total debt service,
including amortization, of more than 1.3 trillion dollars from 1982-90, the
debtor countries as a group began the 1990s fully 61 percent more in debt
than they were in 1982. Sub-Saharan Africa's debt increased by 113 per
cent during this period; the debt burden of the very purest - the so-called
'LLDCs' or 'least developed' countries - was up by 110 per cent."
Many neutral writers are of the view that Third World debt is not just a financial matter,
but a political one. There were always severe conditions attached to IMF and World Bank
loans. Although "program aid" required borrowing nations to conform to a package of
economic and social expenditure measures aimed to ensure that funds are used for
development, yet when projects failed and debts increased, "program aid" was followed
by "structural adjustment" that entailed supervising the development of the entire
economy of the indebted countries. Thus the lenders justified their total interference in
the domestic policies of the Third World nations. As these policies, too, failed to bring a
turnaround in the debt trends, "austerity programs" were introduced whereby expenditure
on social services, welfare and education were cut to a considerable extent. Susan George
and Fabrizio Sabelli have commented the results of these policies as follows:
"Between 1980 and 1989 some thirty-three African countries received 241
structural adjustment loans. During that same period, average GDP per
capita in those countries fell 1.1% per year, while per capita food
production also experienced steady decline. The real value of the
minimum wage dropped by over 25%, government expenditure on
education fell from $11 billion to $7 billion and primary school
enrolments dropped from 80% in 1980 to 69% in 1990. The number of
poor people in these countries rose from 184 million in 1985 to 216
million in 1990, an increase of seventeen per cent."
234. According to the assessment of the World Bank itself, which is subjected to serious
doubts by some economists, the success rate of World-Bank-funded projects has been
less than 50%. In addition, after a review in 1989, World Bank staff were unable to point
out a single project in which the displaced people had been relocated and rehabilitated to
a standard of living comparable to that which they enjoyed before displacement.

83
235. Even the successful projects did seldom bring an overall economic well-being of the
indebted countries. Michael Rowbotham says:
"There has been a massive outpouring of literature on the subject of Third
World debt. The books are characterized by one feature. Whereass the
arguments and policies of the IMF and World Bank have been based upon
an apparently reasonable theory, the studies give case after case and
country after country, in which the theory has not worked in practice.
Either loans have led to development, but repayment has proved
impossible; or the projects funded have failed completely leaving the
country with a massive debt and no hope of repayment, or repeated
additional loans have become necessary simply to provide funds for the
repayment of past loans. The debtor countries, as a group, began the 1990s
fully 61% deeper in debt than they were in 1980."
Many critics have compared the Third World debt with peonage or wage slavery. Cheryl
Payer observes:
"The system can be compared point by point with peonage on an
individual scale. In the peonage, or debt slavery system... the aim of the
employer/creditor/merchant is neither to collect the debt once and for all,
nor to starve the employee to death, but rather to keep the laborer
permanently indentured through his debt to the employer... Precisely the
same system operates on the international level... It is debt slavery on an
international scale. If they remain within the system, the debtor countries
are doomed to perpetual underdevelopment or rather, to development of
their exports at the service of multinational enterprises, at the expense of
development for the needs of their own citizens."
236. In 1987, the conference of the Institute for African Alternatives called for the
winding up of the World Bank and the IMF and a complete end to the dominance of the
Bretton Woods International monetary system. The conference noted the results of the
case studies as follows:
"In virtually all cases, the impact of these (IMF and World Bank) projects
has been basically negative. They have resulted in massive
unemployment, falling real incomes, pernicious inflation, increased
imports with persistent trade deficits, net outflow of capital, mounting
external debts, denial of basic needs, severe hardship and
deindustrialization. Even the so-called success stories in Ghana and the
Ivory Coast have turned out to offer no more than temporary relief which
had collapsed by the mid 1980s. The sectors that have been worst hit are
agriculture, manufacturing and the social services, while the burden of
adjustment has fallen regressively on the poor and weak social groups."
237. These facts should be sufficient to realize fallacy of the illusionary notions that the
Third World countries cannot live without the help of foreign loans. Who has, in fact,
benefited from this system? This question is closely examined by a Canadian scholar
Jaques B. Gelinas in his book "Freedom From Debt". He says:
"The foreign-aid-based development model has proved itself powerless to
bring a single country out of economic and financial dependence.
However, it has turned out to be a source of fabulous wealth for certain

84
 Third World elites, giving birth to a new form of power and a socio-
political class that can rightly be called the 'aidocracy.'"
The case of Pakistan is not much different. At a time when we are in the dire need to
improve the economic status of our people, to eradicate poverty, to raise the level of our
education, and to provide at least the minimum health requirements to our rural areas
where thousands of men, women and children are at the brink of death for want of any
medical aid, we are forced to allocate 46% of our total budget for repayment of interest-
based loans. Still, we are striving to acquire more loans to pay off some of the previous
ones. When these new loans will mature, we will have to incur more debts to satisfy some
of the present liabilities. How far can we proceed in this vicious circle? How long shall
we keep coiling around the spiral of loans over loans? We will have to get rid of this
debt-based economy which has usurped our freedom and has pawned our next
generations in the hands of our lenders. This is a question of life-and-death for our nation,
and we will have to resolve it at any cost.
238. We are not oblivious of the fact that once thrust into the present state of
indebtedness, we cannot free ourselves from it overnight. It will require a well-considered
program and a firm commitment to implement it. In the intervening period, which must
be minimized by competent planning, we will have to live with the present state of
indebtedness. But even in this intervening period, we must try our best to renegotiate with
our lenders to convert the existing loans into Islamic modes of financing. Thanks to the
atmosphere created by the Islamic banking, these modes of financing are no longer totally
unfamiliar to the West. Even the International financial institutions have undertaken
studies to understand them. IFC, the private financing branch of the World Bank has
already expressed its willingness to use some Islamic modes of financing. The assets-
related loans can easily be converted into Leasing arrangement. Project related loans can
be reshaped on the basis of Istisna. The concern of the lenders is to get return on their
loans, and not to insist on a particular form. Therefore, it should not be much difficult to
renegotiate the existing loans on Islamic lines. For new finances even wider variety of
modes is available that can be designed on the basis of Islamic principles. However, it
will be possible only if the government itself has a firm commitment to its Islamic
obligations and a true will to implement what Islam requires. An apologetic attitude can
never convince others to bring change in the long-practiced ideas. Embarrassing for the
whole nation are the remarks of the President of IFC (International Finance Corporation,
an affiliate of the World Bank) in his report to the Board of Directors of IFC about a
proposed investment in the Hala Spinning Mills. He observed:
"A change to Islamic modes of financing has been considered by IFC, but
this would be contrary to the Government (of Pakistan's) intentions for
foreign loans.
Adoption by a foreign lender of Islamic instruments could be construed as
undermining Government's policy to exempt foreign lenders from this
requirement."
239. On November 17, 1990, the Prime Minister of Pakistan had appointed a committee
of experts to analyze the growing dependence of our country on foreign assistance and to
chalk out a plan to reduce this dependence and evolve a self-reliance development
strategy. The committee, headed by the then Senator Prof. Khurshid Ahmad, comprised
the Secretary finance division and the Chief economist of the economic division and

85
several other economic experts. The report of the Committee was submitted to the
government in April 1991. This Committee, after deliberations, came to the conclusion
that even on pure economic grounds, the goal of self-reliance can be achieved only by
elimination of interest. The recommendations of this committee can be availed of while
tackling with the issue of foreign loans.
240. Therefore, the admitted difficulties in resolving the problem of foreign liabilities
cannot be taken as an excuse for exempting them from the prohibition for good or for an
indefinite period on the basis of necessity. However, it cannot be denied that it will take
more time than the domestic transactions. The doctrine of necessity will be applicable to
this extent only.

Conclusions
241. The upshot of the above discussion is that:
242. Any additional amount over the principal in a contract of loan or debt is the riba
prohibited by the Holy Qur'an in several verses. The Holy Prophet, Sall-Allahu alayhi wa
sallam, has also termed the following transactions as riba:
(i) A transaction of money for money of the same denomination where the
quantity on both sides is not equal, either in a spot transaction or in a
transaction based on deferred payment.
(ii) A barter transaction between two weighable or measurable
commodities of the same kind, where the quantity on both sides is not
equal, or where the delivery from any one side is deferred.
(iii) A barter transaction between two different weighable or measurable
commodities where delivery from one side is deferred.
243. These three categories are termed in the Islamic jurisprudence as riba-al-sunnah
because their prohibition is established by the Sunnah of the Holy Prophet, Sall-Allahu
alayhi wa sallam. Along with the riba-al-Qur'an, these are four types of transactions
termed as 'riba' in the literature of Islamic fiqh based on the Holy Qur'an and Sunnah.
244. Out of these four transactions, the last two ones, mentioned above as (ii) and (iii)
have not much relevance to the context of modern business, the barter business being a
rare phenomenon in the modern trade. However, the riba-al-Qur'an, and transaction of
money mentioned above as (i) are more relevant to modern business.
245. In the light of the detailed discussion above, there is no difference between different
types of loan, so far as the prohibition of riba is concerned. It also does not make any
difference whether the additional amount stipulated over the principal loan or debt is
small or large. It is, therefore, held that all the prevailing forms of interest, either in the
banking transactions or in private transactions do fall within the definition of "riba."
Similarly, any interest stipulated in the government borrowings, acquired from domestic
or foreign sources, is riba and clearly prohibited by the Holy Qur'an.
246. The present financial system, based on interest, is against the injunctions of Islam as
laid down by the Holy Qur'an and Sunnah, and in order to bring it in conformity with
Shar'iah, it has to be subjected to radical changes.
247. A variety of Islamic modes of financing have been developed by Islamic scholars,
economists and bankers that may serve as a better alternative to interest. These modes are
being practiced by about 200 Islamic financial institutions in different parts of the world.
248. These alternatives being available, the transactions of interest cannot be allowed to

86
continue for ever on the basis of necessity. Many experienced bankers, to name a few
such as Dr. Ahmad Muhammad Ali, President Islamic Development Bank, Jeddah, Mr.
Adnan al-Bahr, Chief Executive International Investor, Kuwait, Mr. Iqbal Ahmad Khan,
Chief executive Islamic unit of the Hong Kong Shanghai Banking Corporation (HSBC)
based in London from outside Pakistan and Mr. Abdul-Jabbar Khan, the former president
of the National Bank of Pakistan, Mr. Shahid Hasan Siddiqui and Mr. Maqbool Ahmad
Khan from Pakistan are the bankers who have a long experience of banking in different
parts of the world, besides others appeared before us. All of them were unanimous on the
point that Islamic modes of financing are not only feasible, but area also more beneficial
to bring about a balanced and stable economy, for which they have produced detailed
proof based on facts and figures. Some outstanding economists like Dr. Umar Chapra, the
economic advisor to Saudi Monetary Agency, Dr. Arshad Zaman, the former Chief
economist of the ministry of Finance government of Pakistan, Prof. Khurshid Ahmad, Dr.
Nawab Hyder Naqwi, Dr. Waqar Masood Khan, have supported this view in their
detailed discourses.
249. We have also gone through the detailed reports of the council of Islamic Ideology
submitted in 1980, the report of the commission for Islamization of Economy constituted
in 1991, and the final report of the same commission, reconstituted in 1997 which was
submitted in August 1997. We have also perused the report of the Prime Minister's
Committee on Self-Reliance, submitted to the Government in April 1991.
250. There is thus ample evidence to prove that quite a substantial ground work has been
done to suggest the strategy for the transformation of the existing financial system to the
Islamic one, and the present interest based system cannot be retained for an indefinite
period on the basis of necessity. However, the transformation may take some time which
can be allowed on that basis.
251. For the reasons given above, all these appeals are hereby dismissed in the terms
detailed hereafter in the Order of the Court.

State Bank Of Pakistan- Regulation For Islamic Banks

Policies For Promotion Of Islamic Banking
In order to promote Islamic Banking in Pakistan, State Bank is following a three pronged
strategy as under:
I) Establishment of full-fledged Islamic bank(s) in the private sector;
II) Setting up of subsidiaries for Islamic Banking by existing commercial banks; and
III) Allowing Stand-alone branches for Islamic banking in the existing commercial banks.
2. In line with Part-I of this strategy, on 1st December, 2001, State Bank of Pakistan had
issued detailed criteria for setting up of Scheduled Islamic Commercial banks based on
Shariah Principles in the Private Sector in the form of a Press Release, which is
reproduced at Annexure-I.

3. As regards Part-II of this strategy, in terms of Banking Companies (Amendment)

Ordinance, 2002 notified in the Gazette of Pakistan dated November 4, 2002, inter alia, a
new clause (aa) has now been inserted in sub-section (1) of section 23 of the Banking
Companies Ordinance as follows:
“(aa) the carrying on of banking business strictly in conformity with the Injunctions of
Islam as laid down in the Holy Quran and Sunnah”.

87
4. Therefore, the scheduled commercial banks are henceforth allowed to open
subsidiaries for Islamic Banking operations. Accordingly, a Detailed Criteria for setting
up of Islamic Banking Subsidiaries by existing Commercial Banks has been prepared,
which is enclosed at Annexure-II.
5. For Part-III of this strategy, Guidelines for opening of Stand-alone branches for
Islamic banking by existing commercial banks, enlisting Eligibility Criteria, Licensing
Requirements and other operational guidelines on the subject have been prepared. These
Guidelines are enclosed at Annexure-III.
6. Those interested in establishing Scheduled Islamic Commercial Banks in the Private
sector, Subsidiaries or Stand alone branches for Islamic banking, may apply to the
Director, Banking Policy Department, State Bank of Pakistan, I.I. Chundrigar Road,
Karachi in line with the above-mentioned policies.

Islamic Banking through Stand-alone Branches

For Part-III of the strategy, guidelines for opening of stand-alone branches for Islamic
banking by existing commercial banks, enlisting eligibility criteria, licensing
requirements and other operational details on the subject were issued on January 1 2003
vide the above-mentioned circular. The applying bank is required to submit proposal to
the State Bank, outlining the following details:

• Number of branches along with name of city where the Islamic Banking Branch (IBB)
is
to be offered within the next financial year. Products and services to be offered by the
IBB including deposits, financing, investment,etc.
• Method of segregating the funds of IBB from the funds of commercial banking of the
applying bank.
• Infrastructure and logistic requirements, including manpower and training programs.
• The name, qualification and experience of Shariah Adviser (s), and
• Accounting aspects, such as accounting policies to be followed, profit and loss
sharing mechanism, manuals, etc.

The bank will also be required to set up Islamic Banking Division at the Head
Office/Country Office in Pakistan. The responsibilities of this Division have been
depicted in detail. The bank would also appoint a Shariah adviser/Shariah Supervisory
Committee consisting of Shariah scholar(s) of repute to advise the Islamic Banking
Division on matters pertaining to Shariah.
Moreover, the bank shall ensure that proper systems and controls are in place in order to
ensure segregation of funds and to protect the interest of depositors. The banks shall
ensure proper maintenance of records for all transactions for disclosure of assets,
liabilities, expenses and income of IBD/IBB(s). The Islamic Banking Division will also
comply with statutory liquidity and cash reserve requirements determined by SBP.1

88
DETAILED CRITERIA FOR SETTING UP OF SCHEDULED ISLAMIC
COMMERCIAL BANK BASED ON PRINCIPLES OF SHARIA IN THE
PRIVATE SECTOR
The State Bank of Pakistan has issued a detailed criteria for the setting of Scheduled
Islamic Commercial Bank for conducting business based on the principles of Sharia in
the private sector.
Those interested in establishing the Scheduled Islamic Commercial Bank have been
asked to apply to the Director, Islamic Banking Department, State Bank of Pakistan, P.O.
Box No. 4456, I.I. Chundrigar Road, Karachi . Applications may be made giving details
with supporting documents, forms for which can be obtained from the State Bank.
Applications, which are not complete in all respects, shall not be considered.
The following will be the broad criteria for consideration of setting up of the Scheduled
Islamic Commercial Bank:-
i) The proposed bank would be a Public Limited Company and would be listed on the
Stock Exchange. A minimum of 50% of shares shall be offered to the general public.
ii) All financial transactions will be in accordance with the injunctions of “SHARIA”.
iii) The application shall indicate the modes of finance proposed to be used for raising
resources and extending financial assistance.
iv) The applicant will also indicate expertise and other facilities available with them for
ensuring compliance of their banking business with Sharia.
v) To be able to commence business the bank shall have a minimum paid up capital of Rs
1000 million and also shall at all times maintain minimum capital adequacy Ratio of 8%
based on risk weighted assets.
vi) At least 15% of the total paid up capital shall be subscribed personally by the Sponsor
Directors. The number of Sponsor Directors shall not be less than seven. The amount
proposed to be subscribed by each sponsor Director is required to be indicated.
vii) Sponsor Directors should have to declare personal Net Worth, which should not be
less than the amount to be subscribed by them personally. The Net Worth of each sponsor
Director is required to be indicated and supported by a duly authenticated copy of the
latest Wealth Statement filed with the taxation Department. In the case of sponsor
Directors resident in countries where filing of Wealth statement is not a requirement of
law, a certificate of personal Net Worth and general reputation issued by an international
bank of repute would be acceptable. This facility would also be available to applicants
who have recently returned to Pakistan.
viii) Sponsor Director(s) subscribing more than 5% of the total paid up capital shall
clearly indicate their request separately. However such request should commensurate
with his net worth.
ix) Sponsor Directors shall not dispose of their shares in any manner whatsoever for a
minimum period of 3 years and thereafter only with the specific written approval of the
State Bank.
x) Foreign investment by sponsor Directors shall be permissible only on the basis of
capital being non-repatriable, but dividends will be remittable abroad.
xi) Application shall stand disqualified if any of the sponsors and/or Directors their
spouses or firms:-
a) has been convicted by a Court of law in Pakistan or abroad for a criminal offence.

89
b) has been associated with any illegal activity especially banking business, deposit
taking, financial dealings and other business;
c) has failed to meet his or her obligations to banks and other financial institutions.They
shall furnish names of the banks/DFIs along with the names of the branches with which
they have had dealings. Bank reports are also required to be submitted;
d) has defaulted in payment of taxes. They shall indicate their National Tax Numbers;
e) is or has been associated as Director/Chief Executive with the Corporate Bodies
whose corporate and tax record including customs duties, central excise and sales tax has
been unsatisfactory. They shall name the corporate bodies, their bankers and disclose
their tax numbers and dividend record. Those not so associated with Corporate Bodies
would be required to indicate their occupation/profession/trade and highlight their
achievements;
f) in the opinion of the sanctioning authority enjoys adverse reputation regarding integrity
and performance.
xii) Neither one person can be a Director in more than one financial institution nor one
group should have more than one bank.
xiii) Not more than 25% of the sponsor Directors shall be from the same family as
defined in Section 5(ff) of the Banking Companies Ordinance.
xiv) The Chief Executive would be a professional with no adverse information regarding
his integrity and performance and shall require prior clearance of State Bank of Pakistan.
2. The applicant will also submit the following documents along with the request :-
i) Feasibility Study for setting up of Bank including Organization structure and the name
of the proposed Chief Executive.
ii) Short Term and Long term Business Plan.
iii) Risk management guidelines, Plans for Internal control system and scale of authority
iv) Working system and procedures for business operations
v) List of companies / firms and their bankers in which sponsor directors and their family
members as defined in Section 5(ff) of Banking Companies Ordinance, are interested as
Directors, Chief Executive, Partner, Proprietor, or major shareholders holding 5% or
more shares
vi) Certificate that a Shariah Advisor has been appointed in the light of SBP Shariah
Board’s “Fit and Proper Criteria” and the approval of SBP. However, Islamic Banks are
free to appoint a Shariah Committee at their own discretion and not as part of SBP
regulation.
3. The bank which may be permitted to be established, shall be subject to the prevalent
banking and other laws, rules and directives issued by SBP from time to time.
4. The Bank must commence operation within six months of the grant of permission.
They must open at least five branches within a period of twelve months from the date of
permission.
5. The applicant shall deposit Rs 1,000,000/- (Rupees one million) along with the
application as processing fee. The fee so deposited shall be non-refundable.
6. Incomplete application shall be returned and processing fee retained. Re-submission
would attract fresh fee.

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DETAILED CRITERIA FOR SETTING UP OF ISLAMIC BANKING
SUBSIDIARIES BY EXISTING COMMERCIAL BANKS
In order to promote Islamic banking in Pakistan, inter alia, a new clause (aa) has been
now inserted in sub-section (1) of section 23 of the Banking Companies Ordinance, 1962,
in terms of Banking Companies (Amendment) Ordinance, 2002 notified in the Gazette of
Pakistan dated November 4, 2002, as follows:
“(aa) the carrying on of banking business strictly in conformity with the Injunctions of
Islam as laid down in the Holy Quran and Sunnah”.
2. The existing scheduled commercial banks are therefore now also allowed to open
subsidiaries for Islamic Banking operations. The banks interested in establishing a
subsidiary for Islamic banking (“subsidiary”) may apply to the Director, Islamic Banking
Department, State Bank of Pakistan, Post Box No. 4456, I.I. Chundrigar Road, Karachi
. Applications may be made giving details with supporting documents, forms for which
can be obtained from the State Bank. Applications, which are not complete in all
respects, shall not be considered.
3. The following shall be the broad criteria for setting up of a subsidiary, of the existing
scheduled commercial banks, for Islamic banking:-
i) The proposed subsidiary would be a Public Limited Company and would be listed on
the Stock Exchange. A maximum of 49% of shares shall be offered to the general public.
ii) The subsidiary may be granted a license under section 27 of the Banking Companies
Ordinance, 1962 to conduct the banking business strictly in accordance with Sharia and
would be considered as a Scheduled Islamic Commercial Bank.
iii) All financial transactions of the subsidiary will be in accordance with the injunctions
of “SHARIA”.
iv) The application shall indicate the modes of finance proposed to be used for raising
resources and extending financial facilities.
v) The applicant(s) will also indicate expertise and other facilities available with them
for ensuring compliance of their banking business with Sharia.
vi) To be able to commence business, the subsidiary shall have a minimum paid up
capital of Rs 1,000 million and also shall at all times maintain minimum capital adequacy
Ratio of 8% based on risk weighted assets.
vii) At least 51% of the total paid up capital shall be subscribed by the banking
company(ies).
viii) Banks meeting the Capital Adequacy guidelines issued by State Bank and having
CAMELS rating of 1, 2 and 3 during the last three years ON-SITE inspection shall be
eligible for opening the subsidiary.
ix) Banking company(ies) shall not dispose of their shares in any manner whatsoever for
a minimum period of 3 years and thereafter only with the specific written approval of the
State Bank.
x) Application shall stand disqualified if any of the sponsors and/or Directors, their
spouses or firms:-

a) has been convicted by a Court of law in Pakistan or abroad for a criminal offence.
b) has been associated with any illegal activity especially banking business, deposit
taking, financial dealings and other business;
c) has failed to meet his or her obligations to banks and other financial institutions. They

91
shall furnish names of the banks/DFIs alongwith the names of the branches with which
they have had dealings. Bank reports are also required to be submitted;
d) has defaulted in payment of taxes. They shall indicate their National Tax Numbers;
e) is or has been associated as Director/Chief Executive with the Corporate Bodies whose
corporate and tax record including customs duties, central excise and sales tax has been
unsatisfactory. They shall name the corporate bodies, their bankers and disclose their tax
numbers and dividend record. Those not so associated with Corporate Bodies would be
required to indicate their occupation/profession/trade and highlight their achievements;
f) in the opinion of the sanctioning authority enjoys adverse reputation regarding integrity
and performance.
xi) Every Director of the subsidiary shall meet the Fit and Proper Test prescribed by SBP
and would require prior clearance from State Bank of Pakistan.
xii) One person cannot be a Director in more than one bank/financial institution.
xiii) Not more than 25% of the Directors shall be from the same family as defined in
Section 5(ff) of the Banking Companies Ordinance.
xiv) The Chief Executive would be a professional fulfilling the conditions stipulated in
the Fit and Proper Test issued by State Bank and shall require prior clearance of State
Bank of Pakistan.
4. The applicant(s) will also submit the following documents along with the request:-
i) Feasibility Study for setting up of Subsidiary including Organization structure and the
name of the proposed Chief Executive.
ii) Short Term and Long term Business Plan.
iii) Risk management guidelines, plans for Internal control system and delegated
approval authorities
iv) Working system and procedures for business operations
v) List of companies / firms and their bankers in which the banking company(ies),
sponsor directors and their family members as defined in Section 5(ff) of Banking
Companies Ordinance, are interested as Directors, Chief Executive, Partner, Proprietor,
or major shareholders holding 5% or more shares
vi) Certificate that a Shariah Advisor has been appointed in the light of SBP Shariah
Board’s “Fit and Proper Criteria” and the approval of SBP. However, Islamic Banking
Subsidiaries are free to appoint a Shariah Committee at their own discretion and not as
part of SBP regulation.
5. The subsidiary, which may be permitted to be established, shall be subject to the
prevalent banking and other laws, rules and directives issued by SBP from time to time.
6. The subsidiary must commence operation within six months of the grant of permission.
7. The applicant(s) shall deposit Rs. 1 million (Rupees One million only) along with the
application as processing fee. The fee so deposited shall be non-refundable.
8. Incomplete application shall be returned and processing fee retained. Re-submission
would attract fresh fee.

GUIDELINES FOR OPENING OF STAND ALONE BRANCHES FOR ISLAMIC

BANKING BY EXISTING BANKS
With the objective of promoting Islamic banking in Pakistan, the following Guidelines
for opening of Stand-alone branches for Islamic Banking by existing commercial banks
have been prepared by State Bank of Pakistan. The banks desirous of offering Shariah

92
compliant products and services are required to apply to the State Bank for issuance of a
license under these Guidelines.

1. Definitions
The following terms, as used in these Guidelines, shall have the following meanings:-
i) “banks” means commercial banks, including branches of foreign banks operating in
Pakistan, which desire to offer Shariah compliant products and services;
ii) “IBB” or “branch” means the Islamic Banking Branches of commercial banks, which
offer the Shariah compliant products and services only;
iii) “Shariah compliant products and services” means banking products and services
offered by banks to their clients duly approved by their Shariah adviser/Shariah
Supervisory Committee;
iv) “IBF” means the Islamic Banking Fund set up by the banks to fund the operations of
their Islamic Banking Branches;
v) “IBD” means the Islamic Banking Division set up at the head office of the banks/
country offices in Pakistan to administer, supervise and regulate all matters pertaining to
IBB.
vi) “deposit” means deposits mobilized under section 26A of the Banking Companies
Ordinance, 1962.

LICENSING REQUIREMENTS FOR ISLAMIC BANKING BRANCH(ES)

2. Eligibility Criteria
The eligibility of a bank to open Islamic banking branch(es) shall be considered by the
State Bank keeping in view, among others, the financial strength of the bank as evident
from its capital base(net capital free of actual and potential losses), adequacy of its capital
structure, record of earning capabilities, future earning prospects of the bank, managerial
capabilities, bank’s liquidity position, track record of the bank’s adherence to prudential
regulations, credit discipline, quality of customer services and the convenience and the
needs of the population of the area to be served by the proposed branch. In addition, the
following considerations will also be taken in the grant of the license:-

(i) Banks having CAMELS rating of 1, 2 and 3 in the last ON-SITE inspection shall be
eligible for opening Islamic Banking Branches.
(ii) There should not be major adverse inspection findings against the bank.
(iii) The bank shall identify experienced and trained key staff to handle the IBB
operations.

3. Working Paper/Proposal
The applying bank is required to submit a proposal to the Islamic Banking Department
of the State Bank of Pakistan, outlining the following details:-

i) Number of branches alongwith name of city where the IBB is to be offered within the
next financial year.
ii) Products and services to be offered by the IBB including deposits, financing,
investment, etc.
iii) Method of segregating the funds of IBB from the funds of commercial banking of

93
the applying bank.
iv) Infrastructure and logistic requirements, including manpower and training programs.
v) The name, qualification and experience of Shariah Adviser(s).
vi) Accounting aspects, such as accounting policies to be followed, profit and loss
sharing mechanism, etc.
The banks will be required to submit such further information as required by State Bank
while processing the case.

4. Issuance of License
i) State Bank will evaluate the proposal of the bank keeping in view merits of the case
and upon its satisfaction, will grant an approval in principle to the bank for opening of
branch(es) upon such terms and conditions as it deems fit. However, license for
individual branch opening shall be issued on receipt of formal application on prescribed
format under the provisions of Section 28 of the Banking Companies Ordinance, 1962
(Application Form). This will be issued when requirements of para 5 hereof are complied
with and evidence is provided that adequate security arrangements have been provided at
the proposed place of business and the Town Planning Regulations are not violated.

ii) In subsequent years, if the bank wishes to open more branches, the bank shall submit
to State Bank of Pakistan for approval, an Annual Islamic Banking Branch Expansion
Plan (the Plan) at least 30 days before the commencement of each calendar year (January-
December) during which it plans to open branches. The plan would, inter alia, indicate
the number of the new branches proposed to be opened in urban and rural areas, location
of each of the proposed branch and the area which it would serve, branches proposed to
be closed (if any), the number of existing branches incurring losses consecutively for the
last three years, arrangements for managerial and other staff members and information
technology access and linkage for the proposed branches and arrangements for housing
each of the proposed branch. State Bank will consider the Plan for new branches keeping
in view the need of the system and grant approval in principle for number of new
branch(es) that bank will be allowed to open during the given calendar year within 30
days from the date of receipt of the Plan complete in all respect. The approval in principle
granted under a particular Plan shall lapse in case bank fails to submit a formal
application for issuance of license at least 30 days before the expiry of that particular
year. Similarly license issued under the respective Plan shall expire where a bank fails to
open the branch before 31st December of that year.
iii) Request for a new branch in Azad Kashmir will have to be supported by the AJ&K
Government.
iv) The branch(es) shall be subject to the prevalent banking and other laws, rules and
directives issued by SBP from time to time.
v) Banks will be free to shift or reallocate their branches within the same
city/town/village without prior approval of State Bank. Intimation of shifting of a
branch will be sent by the bank concerned to the State Bank within 15 days from the
date of its shifting on prescribed performa

94
vi) The license may be revoked in case it subsequently transpires that the bank had made
material misrepresentation of facts or concealment of material information and the
responsible official(s) shall personally be liable for action under the relevant laws.

5. Commencement of Business
Before commencement of business, the bank will ensure that all the Documents and
agreements pertaining to each type of products and services along with Risk management
guidelines, Plans for Internal control and Information Technology systems are in place.
All relevant documents/agreements and guidelines should be duly certified by their
Shariah Adviser/Committee and a certificate in this regard will be submitted to the State
Bank alongwith the Application Form. All these documents should be made readily
available to the SBP Inspection Team during inspection of the bank.

6. Islamic Banking Division

(i) The bank will be required to set up an Islamic Banking Division (“IBD”) at the
Head Office/Country Office in Pakistan.
(ii) The bank will submit the organizational structure of the IBD along with details of key
persons Of the division (qualification and years and type of experience) to Islamic
Banking Department of the State Bank of Pakistan along with the Application Form.
(iii) The responsibilities of the IBD shall be as follows:-
(a) To manage and be responsible for the operations of IBB(s), including policy and
procedural matters;
(b) To liaise with other departments in the bank and Shariah Adviser/Committee to
ensure smooth operations of IBB(s).
(c) To ensure that all funds pooled into the IBF are channeled into Shariah compliant
financing and investment activities;
(d) To arrange training of staff on Islamic banking;
(e) To arrange for compilation and submission of such returns, as may be required to be
submitted to State Bank from time to time;
(f) To ensure that all directives and guidelines, particularly those applicable to Islamic
banking, issued by State Bank are strictly complied with;
(g) To maintain the Statutory Cash Reserve and Liquidity Requirement with State Bank
as prescribed by State Bank from time to time.
(h) Other roles and responsibilities as determined by the bank or State Bank form time to
time.
(iv) The IBD shall be headed by a senior and experienced officer directly reporting to the
Chief Executive (in case of foreign banks, the Country Manager) and manned by
qualified staff.

7. Islamic Banking Fund

(i) The bank shall be required to maintain a minimum fund of Rs 50 million or 8% of the
risk weighted assets of IBB(s), whichever is higher.
(ii) The IBF shall be funded by way of an allocation by the head office of the bank or
in case of foreign bank, its country office.
(iii) The IBF shall be placed under the control of IBD to fund the operations of the
IBB(s).

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8. Physical set-up
Every licensed branch of a bank shall carry a name, and shall invariably be required to
prominently display the name of the branch as stipulated in the license.

9. Shariah Compliance
A Shariah Advisor has to be appointed in the light of SBP Shariah Board’s “Fit and
Proper Criteria” and the approval of SBP. However, Banks are free to appoint a Shariah
Committee at their own discretion and not as part of SBP regulation.

10. Systems and Control

The bank shall ensure that proper systems and controls are in place in order to ensure
segregation of funds and protect the interest of depositors, including but not limited to the
followings:-
i) The bank shall be required to prepare procedure manuals for the IBD and IBB
operations duly approved by their Shariah Adviser/Shariah Supervisory Committee as
well as the Board of Directors or in case of branches of foreign banks operating in
Pakistan, by their Head Office.
ii) The bank shall prepare a full set of documents pertaining to the deposit, investment
and financing products pertaining to IBB operations.
iii) The full set of the documents duly vetted by their Shariah Adviser/Shariah
Supervisory Committee shall be maintained by the IBD. Similarly, all documents in
respect of new schemes offered by IBB(s) shall also be prepared and maintained by IBD
before launching of the scheme.
iv) All documents (including ledgers, registers, pay-in-slips, cheques, receipts,
passbooks, etc.) used in the IBD and IBB(s) shall be appropriately marked, so as to easily
distinguish them from the documents pertaining to commercial banking.
v) In order to efficiently utilize the existing branch network, the bank may authorize
some of its branches to sell the Islamic banking deposit schemes. However, in such cases
proper systems and control should be in place to ensure that the fund transfer takes place
on the same day to/from the IBB. The authorized branches shall not, in any manner
whatsoever, receive/pay interest on such services. The authorized branches may charge a
reasonable fee/commission on sale of such deposit schemes under a policy to be
approved by the Board of Directors or in case of branches of foreign banks, their Head
Office. Proper training in Islamic banking should also be provided to the staff of
authorized branches dealing with such deposit schemes.
vi) The bank shall be required to undertake comprehensive internal audit including
internal Shariah Review on the operations of the IBB(s) and IBF at least once in a year.

11. Accounting Records and Disclosure

(i) The banks shall keep separate book of accounts in respect of Islamic banking
operations and ensure proper maintenance of records for all transactions for segregation
of funds.
(ii) The banks shall prepare a separate daily trial balance of the operations arising from
the IBB(s).
(iii) Based on the balances of all the items (assets, liabilities, expenses and income)

96
relating to the operations of the IBD/IBB(s), the bank shall prepare and submit separate
annual as well as quarterly financial statements for its IBB operations alongwith its
periodical financial statements on the format prescribed by State Bank from time to time.

12. Statutory Liquidity and Cash Reserve Requirements

In order to maintain the Statutory Cash Reserve and Liquidity requirement in respect of
IBB operations, the IBD will open a separate current account with State Bank. In this
account, IBD will maintain the Cash Reserve with State Bank in the manner prescribed
for commercial banks (at present @ 5% of time and demand liabilities). For Statutory
Liquidity Requirement (SLR), till the development of Shariah compliant approved
securities, they will for the present, maintain an additional cash amount equivalent to 6%
of their TDL in the same current account with State Bank in lieu of SLR (i.e., 40% of
15% SLR at present). Therefore, in all, IBD will maintain 11% of time and demand
liabilities (TDL) of the Islamic banking branches in this current account with State Bank
on weekly average basis and 10% of TDL on daily basis in lieu of CRR and SLR for IBB
operations of the bank.

13. Reporting to State Bank

i) In the Weekly Statement of Position submitted to the State Bank, the banks shall
submit separately the position of IBB operations.
ii) The banks shall also be required to submit such other statements regarding their
Islamic banking operations as prescribed from time to time.

14. Processing Fee

A processing fee @ Rs. 25,000/- per branch applied in the Proposal/Plan has been fixed.
The banks while submitting the Proposal/Plan shall invariably enclose a cheque in the
name of State Bank of Pakistan as processing fee. The Proposal/Plan without the amount
of processing fee shall not be entertained. The processing fee will be non-refundable.

PARTICULARS OF THE ISLAMIC BANKING BRANCH SHIFTED

1. Name of the Bank ____________________________________________________

2. Name of the Branch shifted ____________________________________________

3. Licence No.___________________ Dated_______________________________

4. Premises from which shifted____________________________________________

5. Exact location of the premises to which shifted_____________________________

6. Distance between the old and new branch/booth premises ____________________

7. Date of shifting______________________________________________________

8. Reasons necessitating the shifting (in detail)_______________________________

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__________________________________________________________________

__________________________________________________________________

9. Working results of the branch/booth at the old place, i.e. deposits advances and profit
& loss accounts for

the last three financial years

10. No of Accounts (category-wise) as at the end of last financial year and on the date
of shifting.

11. Distance (in meters/kilo meters) of the old premises with nearest branches of other
banks.

S. No. Name of Bank Name of Branch Distance

12. Distance (in meters/kilo meters) of the new premises from the nearest branches of
other banks.

S. No. Name of Bank Name of Branch Distance

12. Certified that location of new premises does not violate the Town Planning
Regulations of the concerned authority.

13. Certificate from the competent authorities that both the existing and proposed
premises are: (a) within the same locality (in case of branches at banked places including
big cities); (b) within the same territorial

limits of the same village (in case of branches at un-banked places).

(Counter Signature of an Officer not (Signature of Officer Incharge

below the rank of Sr. Vice President of of the Branch with date)
the Head Office or equivalent with date)

Modes of Islamic Banking

Riba
The word "Riba" means excess, increase or addition, which correctly interpreted
according to Shariah terminology, implies any excess compensation without due
consideration (consideration does not include time value of money). The definition of
riba in classical Islamic jurisprudence was "surplus value without counterpart." or "to
ensure equivalency in real value" and that "numerical value was immaterial." During this
period, gold and silver currencies were the benchmark metals that defined the value of all
other materials being traded. Applying interest to the benchmark itself (ex natura sua)
made no logical sense as its value remained constant relative to all other materials: these

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metals could be added to but not created (from nothing).
Applying interest was acceptable under some circumstances. Currencies that were based
on guarantees by a government to honor the stated value (i.e. fiat currency) or based on
other materials such as paper or base metals were allowed to have interest applied to
them. When base metal currencies were first introduced in the Islamic world, no jurist
ever thought that "paying a debt in a higher number of units of this fiat money was riba"
as they were concerned with the real value of money (determined by weight only) rather
than the numerical value. For example, it was acceptable for a loan of 1000 gold dinars to
be paid back as 1050 dinars of equal aggregate weight (i.e., the value in terms of weight
had to be same because all makes of coins did not carry exactly similar weight).

Modern Islamic banking

The first modern experiment with Islamic banking was undertaken in Egypt under cover
without projecting an Islamic image for fear of being seen as a manifestation of Islamic
fundamentalism that was anathema to the political regime. The pioneering effort, led by
Ahmad Elnaggar, took the form of a savings bank based on profit-sharing in the Egyptian
town of Mit Ghamr in 1963. This experiment lasted until 1967 (Ready 1981), by which
time there were nine such banks in the country.[10]
In 1972, the Mit Ghamr Savings project became part of Nasr Social Bank which, till date,
is still in business in Egypt. In 1975, the Islamic Development Bank was set-up with the
mission to provide funding to projects in the member countries. The first modern
commercial Islamic bank, Dubai Islamic Bank, opened its doors in 1975. In the early
years, the products offered were basic and strongly founded on conventional banking
products, but in the last few years the industry is starting to see strong development in
new products and services.
Islamic Banking is growing at a rate of 10-15% per year and with signs of consistent
future growth. Islamic banks have more than 300 institutions spread over 51 countries,
including the United States through companies such as the Michigan-based University
Bank, as well as an additional 250 mutual funds that comply with Islamic principles. It is
estimated that over US$822 billion worldwide sharia-compliant assets are managed
according to The Banker.
The World Islamic Banking Conference, held annually in Bahrain since 1994, is
internationally recognized as the largest and most significant gathering of Islamic
banking and finance leaders in the world.
The Vatican has put forward the idea that "the principles of Islamic finance may
represent a possible cure for ailing markets."

Principles
Islamic banking has the same purpose as conventional banking except that it operates in
accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on
transactions). The basic principle of Islamic banking is the sharing of profit and loss and
the prohibition of riba (usury). Common terms used in Islamic banking include profit
sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus
(Murabahah), and leasing (Ijarah).
In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the
item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit,

99
while allowing the buyer to pay the bank in installments. However, the fact that it is
profit cannot be made explicit and therefore there are no additional penalties for late
payment. In order to protect itself against default, the bank asks for strict collateral. The
goods or land is registered to the name of the buyer from the start of the transaction. This
arrangement is called Murabaha. Another approach is EIjara wa EIqtina, which is similar
to real estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the
vehicle at a higher-than-market price to the debtor and then retaining ownership of the
vehicle until the loan is paid).
An innovative approach applied by some banks for home loans, called Musharaka al-
Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower form
a partnership entity, both providing capital at an agreed percentage to purchase the
property. The partnership entity then rents out the property to the borrower and charges
rent. The bank and the borrower will then share the proceeds from this rent based on the
current equity share of the partnership. At the same time, the borrower in the partnership
entity also buys the bank's share of the property at agreed installments until the full equity
is transferred to the borrower and the partnership is ended. If default occurs, both the
bank and the borrower receive a proportion of the proceeds from the sale of the property
based on each party's current equity. This method allows for floating rates according to
the current market rate such as the BLR (base lending rate), especially in a dual-banking
system like in Malaysia.
There are several other approaches used in business transactions. Islamic banks lend their
money to companies by issuing floating rate interest loans. The floating rate of interest is
pegged to the company's individual rate of return. Thus the bank's profit on the loan is
equal to a certain percentage of the company's profits. Once the principal amount of the
loan is repaid, the profit-sharing arrangement is concluded. This practice is called
Musharaka. Further, Mudaraba is venture capital funding of an entrepreneur who
provides labor while financing is provided by the bank so that both profit and risk are
shared. Such participatory arrangements between capital and labor reflect the Islamic
view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced
distribution of income and not allowing lender to monopolize the economy.
And finally, Islamic banking is restricted to Islamically acceptable transactions, which
exclude those involving alcohol, pork, gambling, etc. Thus ethical investing is the only
acceptable form of investment, and moral purchasing is encouraged. In theory, Islamic
banking is an example of full-reserve banking, with banks achieving a 100% reserve
ratio.[14] However, in practice, this is not the case, and no examples of 100 per cent reserve
banking are observed. Islamic banks have grown recently in the Muslim world but are a
very small share of the global banking system. Micro-lending institutions founded by
Muslims, notably Grameen Bank, use conventional lending practices and are popular in
some Muslim nations, especially Bangladesh, but some do not consider them true Islamic
banking. However, Muhammad Yunus, the founder of Grameen Bank and microfinance
banking, and other supporters of microfinance, argue that the lack of collateral and lack
of excessive interest in micro-lending is consistent with the Islamic prohibition of usury
(riba).

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Shariah Advisory Council/Consultant
Islamic banks and banking institutions that offer Islamic banking products and services
(IBS banks) are required to establish a Shariah Supervisory Board (SSB) to advise them
and to ensure that the operations and activities of the bank comply with Shariah
principles. On the other hand, there are also those who believe that no form of banking
can ever comply with the Shariah.[18]
In Malaysia, the National Shariah Advisory Council, which additionally set up at Bank
Negara Malaysia (BNM), advises BNM on the Shariah aspects of the operations of these
institutions and on their products and services. (See: Islamic banking in Malaysia). In
Indonesia the Ulama Council serves a similar purpose.
A number of Shariah advisory firms (either standalone or subsidiaries of larger financial
groups) have now emerged to offer Shariah advisory services to the institutions offering
Islamic financial services. Issue of independence, impartiality and conflicts of interest
have also been recently voiced.

Islamic financial transaction terminology

Bai' al-inah (sale and buy-back agreement)
The financier sells an asset to the customer on a deferred-payment basis, and then the
asset is immediately repurchased by the financier for cash at a discount. The buying back
agreement allows the bank to assume ownership over the asset in order to protect against
default without explicitly charging interest in the event of late payments or insolvency.
Some scholars believe that this is not compliant with Shariah principles.[19][20]

Bai' bithaman ajil (deferred payment sale)

This concept refers to the sale of goods on a deferred payment basis at a price, which
includes a profit margin agreed to by both parties. This is similar to Murabahah, except
that the debtor makes only a single installment on the maturity date of the loan. By the
application of a discount rate, an Islamic bank can collect the market rate of interest
Bai muajjal (credit sale)
Literally bai muajjal means a credit sale. Technically, it is a financing technique adopted
by Islamic banks that takes the form of murabaha muajjal. It is a contract in which the
bank earns a profit margin on the purchase price and allows the buyer to pay the price of
the commodity at a future date in a lump sum or in installments. It has to expressly
mention cost of the commodity and the margin of profit is mutually agreed. The price
fixed for the commodity in such a transaction can be the same as the spot price or higher
or lower than the spot price. (Deferred-payment sale)

Mudarabah (profit sharing)

Mudarabah is an arrangement or agreement between the bank, or a capital provider, and
an entrepreneur, whereby the entrepreneur can mobilize the funds of the former for its
business activity. The entrepreneur provides expertise, labor and management. Profits
made are shared between the bank and the entrepreneur according to predetermined ratio.
In case of loss, the bank loses the capital, while the entrepreneur loses his provision of
labor. It is this financial risk, according to the Shariah, that justifies the bank's claim to
part of the profit. The profit-sharing continues until the loan is repaid. The bank is
compensated for the time value of its money in the form of a floating rate that is pegged

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to the debtor's profits.

Murabahah (cost plus)

"Mudarabah" is a special kind of partnership where one partner gives money to another
for investing it in a commercial enterprise. The investment comes from the first partner
who is called "rabb-ul-mal", while the management and work is an exclusive
responsibility of the other, who is called "mudarib". This concept refers to the sale of
goods at a price, which includes a profit margin agreed to by both parties. The purchase
and selling price, other costs, and the profit margin must be clearly stated at the time of
the sale agreement. The bank is compensated for the time value of its money in the form
of the profit margin. This is a fixed-income loan for the purchase of a real asset (such as
real estate or a vehicle), with a fixed rate of profit determined by the profit margin. The
bank is not compensated for the time value of money outside of the contracted term (i.e.,
the bank cannot charge additional profit on late payments); however, the asset remains as
a mortgage with the bank until the Murabaha is paid in full.
This type of transaction is similar to rent-to-own arrangements for furniture or appliances
that are very common in North American stores.

Musawamah
Musawamah is the negotiation of a selling price between two parties without reference by
the seller to either costs or asking price. While the seller may or may not have full
knowledge of the cost of the item being negotiated, they are under no obligation to reveal
these costs as part of the negotiation process. This difference in obligation by the seller is
the key distinction between Murabaha and Musawamah with all other rules as described
in Murabaha remaining the same. Musawamah is the most common type of trading
negotiation seen in Islamic commerce.
Bai salam
Bai salam means a contract in which advance payment is made for goods to be delivered
later on. The seller undertakes to supply some specific goods to the buyer at a future date
in exchange of an advance price fully paid at the time of contract. It is necessary that the
quality of the commodity intended to be purchased is fully specified leaving no
ambiguity leading to dispute. The objects of this sale are goods and cannot be gold,
silver, or currencies based on these metals. Barring this, Bai Salam covers almost
everything that is capable of being definitely described as to quantity, quality, and
workmanship.

Basic features and conditions of Salam

1. The transaction is considered Salam if the buyer has paid the purchase price to the
seller in full at the time of sale. This is necessary so that the buyer can show that
they are not entering into debt with a second party in order to eliminate the debt
with the first party, an act prohibited under Sharia. The idea of Salam is to
provide a mechanism that ensures that the seller has the liquidity they expected
from entering into the transaction in the first place. If the price were not paid in
full, the basic purpose of the transaction would have been defeated. Muslim jurists
are unanimous in their opinion that full payment of the purchase price is key for
Salam to exist. Imam Malik is also of the opinion that the seller may defer

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 accepting the funds from the buyer for two or three days, but this delay should not
form part of the agreement.
2. Salam can be effected in those commodities only the quality and quantity of
which can be specified exactly. The things whose quality or quantity is not
determined by specification cannot be sold through the contract of salam. For
example, precious stones cannot be sold on the basis of salam, because every
piece of precious stones is normally different from the other either in its quality or
in its size or weight and their exact specification is not generally possible.
3. Salam cannot be effected on a particular commodity or on a product of a
particular field or farm. For example, if the seller undertakes to supply the wheat
of a particular field, or the fruit of a particular tree, the salam will not be valid,
because there is a possibility that the crop of that particular field or the fruit of
that tree is destroyed before delivery, and, given such possibility, the delivery
remains uncertain. The same rule is applicable to every commodity the supply of
which is not certain.
4. It is necessary that the quality of the commodity (intended to be purchased
through salam) is fully specified leaving no ambiguity which may lead to a
dispute. All the possible details in this respect must be expressly mentioned.
5. It is also necessary that the quantity of the commodity is agreed upon in
unequivocal terms. If the commodity is quantified in weights according to the
usage of its traders, its weight must be determined, and if it is quantified through
measures, its exact measure should be known. What is normally weighed cannot
be quantified in measures and vice versa.
6. The exact date and place of delivery must be specified in the contract.
7. Salam cannot be effected in respect of things which must be delivered at spot. For
example, if gold is purchased in exchange of silver, it is necessary, according to
Shari'ah, that the delivery of both be simultaneous. Here, salam cannot work.
Similarly, if wheat is bartered for barley, the simultaneous delivery of both is
necessary for the validity of sale. Therefore the contract of salam in this case is
not allowed.

Hibah (gift)
This is a token given voluntarily by a debtor to a creditor in return for a loan. Hibah
usually arises in practice when Islamic banks voluntarily pay their customers a 'gift' on
savings account balances, representing a portion of the profit made by using those
savings account balances in other activities.
It is important to note that while it appears similar to interest, and may, in effect, have the
same outcome, Hibah is a voluntary payment made (or not made) at the bank's discretion,
and cannot be 'guaranteed.' However, the opportunity of receiving high Hibah will draw
in customers' savings, providing the bank with capital necessary to create its profits; if the
ventures are profitable, then some of those profits may be gifted back to its customers as
Hibah.

Ijarah
Ijarah means lease, rent or wage. Generally, Ijarah concept means selling benefit or use
or service for a fixed price or wage. Under this concept, the Bank makes available to the

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customer the use of service of assets / equipments such as plant, office automation, motor
vehicle for a fixed period and price.

Advantages of Ijarah
Ijarah provides the following advantages to the Lessee:
Ijarah conserves the Lessee' capital since it allows up to 100% financing.
Ijarah gives the Lessee the right to access the equipment on payment of the first
installment. This is important as it is the access and use (and not ownership) of equipment
that generates income.
Ijarah arrangements aid corporate planning and budgeting by allowing the negotiation of
flexible terms
Ijarah is not considered Debt Financing so it does not appear on the Lessee' Balance
Sheet as a Liability. This method of "off-balance-sheet" financing means that it is not
included in the Debt Ratios used by bankers to determine financing limits. This allows
the Lessee to enter into other lease financing arrangements without impacting his overall
debt rating.
All payments towards Ijarah contracts are treated as operating expenses and are therefore
fully tax-deductible. Leasing thus offers tax-advantages to for-profit operations.
Many types of equipment (i.e computers) become obsolete before the end of their actual
economic life. Ijarah contracts allow the transfer of risk from the Lesse to the Lessor in
exchange for a higher lease rate. This higher rate can be viewed as insurance against
obsolescence.
If the equipment is used for a relatively short period of time, it may be more profitable to
lease than to buy.
If the equipment is used for a short period but has a very poor resale value, leasing avoids
having to account for and depreciate the equipment under normal accounting principles.
Ijarah thumma al bai' (hire purchase)
Parties enter into contracts that come into effect serially, to form a complete lease/
buyback transaction. The first contract is an Ijarah that outlines the terms for leasing or
renting over a fixed period, and the second contract is a Bai that triggers a sale or
purchase once the term of the Ijarah is complete. For example, in a car financing facility,
a customer enters into the first contract and leases the car from the owner (bank) at an
agreed amount over a specific period. When the lease period expires, the second contract
comes into effect, which enables the customer to purchase the car at an agreed to price.
The bank generates a profit by determining in advance the cost of the item, its residual
value at the end of the term and the time value or profit margin for the money being
invested in purchasing the product to be leased for the intended term. The combining of
these three figures becomes the basis for the contract between the Bank and the client for
the initial lease contract.
This type of transaction is similar to the contractum trinius, a legal maneuver used by
European bankers and merchants during the Middle Ages to sidestep the Church's
prohibition on interest bearing loans. In a contractum, two parties would enter into three
concurrent and interrelated legal contracts, the net effect being the paying of a fee for the
use of money for the term of the loan. The use of concurrent interrelated contracts is also
prohibited under Shariah Law.

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Ijarah-wal-iqtina
A contract under which an Islamic bank provides equipment, building, or other assets to
the client against an agreed rental together with a unilateral undertaking by the bank or
the client that at the end of the lease period, the ownership in the asset would be
transferred to the lessee. The undertaking or the promise does not become an integral part
of the lease contract to make it conditional. The rentals as well as the purchase price are
fixed in such manner that the bank gets back its principal sum along with profit over the
period of lease.

Musharakah (joint venture)

Musharakah is a relationship between two parties or more, of whom contribute capital to
a business, and divide the net profit and loss pro rata. This is often used in investment
projects, letters of credit, and the purchase or real estate or property. In the case of real
estate or property, the bank assess an imputed rent and will share it as agreed in advance.
All providers of capital are entitled to participate in management, but not necessarily
required to do so. The profit is distributed among the partners in pre-agreed ratios, while
the loss is borne by each partner strictly in proportion to respective capital contributions.
This concept is distinct from fixed-income investing (i.e. issuance of loans).

Qard hassan/ Qardul hassan (good loan/benevolent loan)

This is a loan extended on a goodwill basis, and the debtor is only required to repay the
amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount
beyond the principal amount of the loan (without promising it) as a token of appreciation
to the creditor. In the case that the debtor does not pay an extra amount to the creditor,
this transaction is a true interest-free loan. Some Muslims consider this to be the only
type of loan that does not violate the prohibition on riba, since it is the one type of loan
that truly does not compensate the creditor for the time value of money.[23]

Sukuk (Islamic bonds)

Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic
equivalent of bond. However, fixed-income, interest-bearing bonds are not permissible in
Islam. Hence, Sukuk are securities that comply with the Islamic law (Shariah) and its
investment principles, which prohibit the charging or paying of interest. Financial assets
that comply with the Islamic law can be classified in accordance with their tradability and
non-tradability in the secondary markets.

Takaful (Islamic insurance)

Takaful is an alternative form of cover that a Muslim can avail himself against the risk of
loss due to misfortunes. Takaful is based on the idea that what is uncertain with respect to
an individual may cease to be uncertain with respect to a very large number of similar
individuals. Insurance by combining the risks of many people enables each individual to
enjoy the advantage provided by the law of large numbers. See Takaful for details.

Wadiah (safekeeping)
In Wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits funds in

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the bank and the bank guarantees refund of the entire amount of the deposit, or any part
of the outstanding amount, when the depositor demands it. The depositor, at the bank's
discretion, may be rewarded with Hibah (see above) as a form of appreciation for the use
of funds by the bank.

Wakalah (power of attorney)

This occurs when a person appoints a representative to undertake transactions on his/her
behalf, similar to a power of attorney.

Islamic equity funds

Islamic investment equity funds market is one of the fastest-growing sectors within the
Islamic financial system. Currently, there are approximately 100 Islamic equity funds
worldwide. The total assets managed through these funds currently exceed US$5 billion
and is growing by 12–15% per annum. With the continuous interest in the Islamic
financial system, there are positive signs that more funds will be launched. Some Western
majors have just joined the fray or are thinking of launching similar Islamic equity
products.
Despite these successes, this market has seen a record of poor marketing as emphasis is
on products and not on addressing the needs of investors. Over the last few years, quite a
number of funds have closed down. Most of the funds tend to target high net worth
individuals and corporate institutions, with minimum investments ranging from
US$50,000 to as high as US$1 million. Target markets for Islamic funds vary, some cater
for their local markets, e.g., Malaysia and Gulf-based investment funds. Others clearly
target the Middle East and Gulf regions, neglecting local markets and have been accused
of failing to serve Muslim communities.
Since the launch of Islamic equity funds in the early 1990s, there has been the
establishment of credible equity benchmarks by Dow Jones Islamic market index (Dow
Jones Indexes pioneered Islamic investment indexing in 1999) and the FTSE Global
Islamic Index Series. The Web site failaka.com monitors the performance of Islamic
equity funds and provide a comprehensive list of the Islamic funds worldwide.

Islamic laws on trading

The Qur'an prohibits gambling (games of chance involving money) and insuring ones'
health or property (also a game of chance). The hadith, in addition to prohibiting
gambling (games of chance), also prohibits bayu al-gharar (trading in risk, where the
Arabic word gharar is taken to mean "risk" or excessive uncertainty).
The Hanafi madhab (legal school) in Islam defines gharar as "that whose consequences
are hidden." The Shafi legal school defined gharar as "that whose nature and
consequences are hidden" or "that which admits two possibilities, with the less desirable
one being more likely." The Hanbali school defined it as "that whose consequences are
unknown" or "that which is undeliverable, whether it exists or not." Ibn Hazm of the
Zahiri school wrote "Gharar is where the buyer does not know what he bought, or the
seller does not know what he sold." The modern scholar of Islam, Professor Mustafa Al-
Zarqa, wrote that "Gharar is the sale of probable items whose existence or characteristics
are not certain, due to the risky nature that makes the trade similar to gambling." There
are a number of hadith that forbid trading in gharar, often giving specific examples of

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gharhar transactions (e.g., selling the birds in the sky or the fish in the water, the catch of
the diver, an unborn calf in its mother's womb etc.). Jurists have sought many complete
definitions of the term. They also came up with the concept of yasir (minor risk); a
financial transaction with a minor risk is deemed to be halal (permissible) while trading
in non-minor risk (bayu al-ghasar) is deemed to be haram.
What gharar is, exactly, was never fully decided upon by the Muslim jurists. This was
mainly due to the complication of having to decide what is and is not a minor risk.
Derivatives instruments (such as stock options) have only become common relatively
recently. Some Islamic banks do provide brokerage services for stock trading.

Microfinance
Microfinance is a key concern for Muslims states and recently Islamic banks also. Islamic
microfinance tools can enhance security of tenure and contribute to transformation of
lives of the poor.[25] Already, several microfinance institutions (MFIs) such as FINCA
Afghanistan have introduced Islamic-compliant financial instruments that accommodate
sharia criteria.

Controversy
In Islamabad, Pakistan, on June 16, 2004: Members of leading Islamist political party in
Pakistan, the Muttahida Majlis-e-Amal (MMA) party, staged a protest walkout from the
National Assembly of Pakistan against what they termed derogatory remarks by a
minority member on interest banking:
Taking part in the budget debate, M.P. Bhindara, a minority MNA [Member of the
National Assembly]...referred to a decree by an Al-Azhar University's scholar that bank
interest was not un-Islamic. He said without interest the country could not get foreign
loans and could not achieve the desired progress. A pandemonium broke out in the house
over his remarks as a number of MMA members...rose from their seats in protest and
tried to respond to Mr Bhindara's observations. However, they were not allowed to speak
on a point of order that led to their walkout. Later, the opposition members were
persuaded by a team of ministers...to return to the house...the government team accepted
the right of the MMA to respond to the minority member's remarks. Sahibzada Fazal
Karim said the Council of Islamic ideology had decreed that interest in all its forms was
haram in an Islamic society. Hence, he said, no member had the right to negate this
settled issue.
Some Islamic banks generate loss by charging for the time value of money, the common
economic definition of Interest (Riba). These institutions are criticized in some quarters
of the Muslim community for their lack of strict adherence to Sharia.
The concept of Ijarah is used by some Islamic Banks (the Islami Bank in Bangladesh, for
example) to apply to the use of money instead of the more accepted application of
supplying goods or services using money as a vehicle. A fixed fee is added to the amount
of the loan that must be paid to the bank regardless if the loan generates a return on
investment or not. The reasoning is that if the amount owed does not change over time, it
is profit and not interest and therefore acceptable under Sharia.
Islamic banks are also criticized by some for not applying the principle of Mudarabah in
an acceptable manner. Where Mudarabah stresses the sharing of risk, critics point out that
these banks are eager to take part in profit-sharing but they have little tolerance for risk.

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To some in the Muslim community, these banks may be conforming to the strict legal
interpretations of Sharia but avoid recognizing the intent that made the law necessary in
the first place.

The Role of Central Banks in Islamic Banking

Dr. Iraj Toutounchian
Prof. C. G. Harcourt:
"...ideologies…affect the topics discussed, the manner of discussion, the factors included
or left out or inadequately stressed in arguments, comments, and models and attitudes
shown, sympathetic or hostile,…to past and contemporary economists' works and views”.
Based upon above statement it can be argued that there are a lot of differences between
Islamic and conventional banking systems both at micro and macro levels. These
differences are in approach, in concepts, and in the resulting behaviour.
My presentation is based upon the following primary and secondary assertions, which are
the result of 27 papers and 3 books. The last book: "Comparative Money and Banking in
Capitalistic and Islamic Systems", in 856 pages, has been recognized in February 2002 in
Iran as "The Economic Book of The Year". These assertions and the final conclusion may
seem rather unorthodox, but they are the product of their own logical reasoning. The
essence of my paper is thus nothing but one of the logical consequences, among others,
of the following assertions everybody is able to derive.
Primary assertions are those, which can directly be used to reach the final conclusion of
this paper. Secondary assertions are key issues to be used, one way or another, to lead
one to the problems in implementing Islamic Banking. These two types of assertions,
however, constitute separable sets.
Based upon the fact that the primary function of banks is to deal with "money", one
cannot speak about “banking" without referring to money. Hence, it seems a "must" to
understand money first. Otherwise many Miss-interpretations may arise as the result.
Interest and profit, although being clear concepts, have been subjected to many
misunderstandings. To be sure, let me make them clear at the outset. Interest and profit
are rewards to money and capital investment, respectively. In other words, capital
investment produces profits and money produces interest. Furthermore, it has constantly
and mistakenly written and quoted by some writers that the price of money is 1 (unity).
One is the exchange rate of money with itself; but the price of money is interest (rate).
Some of my findings about the nature and role of profits closely correspond to those of
Prof. Adrian Wood in his seminal book " A Theory of Profits ". With the abolishment of
interest (as it has in Islamic school of economic thought), the LM curve loses its total
validity and becomes redundant and useless.
All in all, interest is a normative concept (basically discussed in schools of economic
thoughts), which can neither be proved nor refuted by use of scientific tools of analysis. It
is a value judgement. In evaluating an economic system, economists are supposed to take
it for granted.
Assertions:
1. In economics we are basically dealing with two inter-related concepts; one is legal (or
conventional) concept and the other is real concept. To distinguish one from another, one
does not need to focus on the physical features of each one. All contractual agreements
like marriage, ownership, organizational hierarchy, money, interest, and the like fall into
the first category; while human beings, commodities, buildings, amenity, and the like are

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included in the second category. Each one of these two concepts is able to produce the
other or be transformed into itself. Let us call these two properties " Completeness" and "
Reflexivity", respectively. Hence, money itself being a legal concept is capable to
producing another legal concept (actually its derivative) called "interest" or to produce
real concept like capital equipment.
2. Money as a potential capital is a legal (conventional) concept capable of being
transformed into actual capital. A simple example would be Mudarabah contract, among
others, in which as soon as one person's money is legally combined with another person's
labour force, the nature and the function of money is changed into capital. Given that in
an Islamic framework there is no reward to money lending (i.e. interest being zero) yet
capital (i.e. money's transformed version) is eligible for part of the profit earned.
3. Various modes of contract available to Islamic banks are the major source of
transforming money deposits of individuals and firms into capital (or asset). Any type of
financing under any modes of contract by these banks will essentially increase the value
of the asset of the economy. However, some modes of contract like Musharakah and
instalment sales (originated by firms) increase the productive capacity of the economy.
Any positive change in the firm's asset values (rather than their capital values which is by
itself a vague concept responsible for some obscurities) can be called " investment".
Following this practice it is easy to calculate, rather than to estimate, the amount of
investment, which has taken place in an economy during one specific year with relatively
high precision. This can be done by reading the asset values off the current balance
sheets, firms submit to tax authorities. By putting asset values, instead of capital, into the
production function, not only it becomes more precise, but also meaningful. Firms' rate of
profit is, hence, logically defined as the ratio of profit to their assets. Since the value of
firms' assets is normally greater than their value of capital, therefore, the rate of profit
defined as the ratio of profit to the value of capital, underestimates the true rate of profit.
4. Based upon J. M. Keynes' criticism on the classical economists inability to recognize
speculative demand for money in the presence of interest (rate), it can easily be shown
that interest is both necessary and sufficient condition for speculation. In other words,
there is a two-way relationship between interest and speculation. It is probably for this
reason that he has also recognized commodities rates of interest in addition to money rate
of interest that he was much concerned about. That is, whenever a commodity is
speculated upon a specific rate of interest would emerge. With the abolishment of
interest, speculative motive of the demand for money, logically derived from interest,
would disappear. Speculation, which necessarily entails artificial risk in any market, be it
in money, bond, gold, commodities and the like, is not permissible in an Islamic setting.
All of these can safely be taken under the heading of "gambling".
A corollary to the above assertion is that with the disappearance of bond market stocks
are expected to be exchanged in an Islamic stock market based upon their book values. In
terms of Tobin's Q this quotient is supposed to be close to unity (one). It is because in a
world with perfect markets, economic value (EV) and replacement cost (RC), will
coincide. This brings the quotient to unity. An implication of this is that in a world with
perfect markets valuing the firm would be easy; i.e. we could read the economic value of
the firm off the current balance sheet. Risk is essentially interwoven with investment. It
can be considered "natural" and hence permissible in Islam. However, impermissibility of
artificial risk may be grounded upon the fact that any income received by speculator will

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eventually bring about excess demand for goods and services (without the speculator
having any share in productive activities). This excess demand, in turn, becomes the main
source of inflation.
Let me conclude discussing about this assertion by citing two statements correctly made
by Prof. Gardner Ackley:

a) "Speculation - if mistaken - tends ultimately to be self -correcting in any commodity

market. "
b) " ...the real cause of unemployment is speculative demand for money".

5. The natural consequence of elimination of interest, as said earlier, is the elimination of

money market. Hence, the major motive to use money is for transaction purposes, which
underlies the structure of ordinary demand and supply schedules for goods and services.
Furthermore, based upon the logical statement that "the speculative motive is derived
from money's use as an asset, as a store of value", money can no longer possess the "store
of value function" in an Islamic framework.
In the absence of interest, money market and speculation, and all monetary policy tools
used in conventional banking, would lose their validity in Islamic banking. Let us call the
policy followed in this new setting "Financial Policy". The unique and powerful tool of
financial policy is to determine the share of profit relative to that of capital for all
investment projects submitted to Islamic banks. This is probably the most important role
a central bank can play in an Islamic banking. There are many factors underlying the
determination of this share, especially in the face of natural risk.
This share if effectively used would make bank's sources of finance properly channelled
into asset building processes without worrying about money whirlpool to emerge. To
determine equilibrium in this market the relative profit rate of the Islamic bank (call it
financier) to that of the investor (call it the financee) can be constructed. This rate is
especially useful in cases where different risks are involved. To prepare a list of different
risks involved in various investment projects is another important task of a central bank.
6. Western economists have always and justifiably been worried about unnecessary
expansion of money supply the volume of which is hard to control by central banks. This
is due to the fact that considerable portion of it (very difficult to determine if not
impossible due to uncertainties involved in interest rates) goes to money whirlpool. This
is probably the reason Prof. Milton Friedman in his paper addressing the problem of
stabilization policy has advocated the Required Reserve Ratio (RRR) to be raised to one
hundred percent. It is clear that such a banking, if possible, would lose its own entity and
merely becomes safe-deposit office. If Islamic banks are prohibited to lend on interest
nonetheless different modes of contract, as mentioned earlier, are available to them to
finance specific needs of both firms and individuals upon their proper requests. If
constant and effective supervision is conducted on a random basis by the central bank the
chances are very slim a money market, which could be outlawed, to be developed. So the
kernel of Islamic banking is Profit and Loss Sharing (PLS). By preparing accurate
information and making them available to the general public, central bank in Islamic
banking system would be able to provide symmetric information and prevent moral
hazard, to a great extent.
7. Money's inability to be a tradable entity and its production and volume being closely

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watched by the central bank (which is apart of the public sector), seems appropriate to be
classified as "Impure Public Good" in an Islamic state. For the sake of brevity some
properties of (impure) public goods which also applies to money, in this setting, will be
outlined as follows:

a) Non-existence of money market.

b) Elimination of speculation.
c) Demand for it can be constructed by vertical summation of individual demands.
d) Externality of money can be derived from its capability of becoming actual capital;
hence, government's (i.e. central bank's) intervention. Furthermore, it benefits each
person simultaneously and is thus equally available to each person. Simultaneous benefit
is not a "must" for a "thing" to be public. A good example is highway. Highways do not
generate simultaneous benefit to all individuals; they are equally available to all
individuals. Non-exclusion principle also applies here. Additional individuals looking for
money may be added at zero marginal cost.
e) Indivisibility of money refers to its purchasing power and not its physical character.
f) Its velocity is greater than unity implying that one is not supposed to "capture" it as
opposed to the case of private good whose velocity is unity implying that it can be
"captured".
A caveat is in order here. Money has two distinct attributes; one at micro and the other at
a macro level. At the micro level, it is part of the asset of an individual possessing it. But
at macro level it cannot be added to the assets of the economy. To count money as wealth
(or asset) of a nation will lead one to commit both fallacy of composition and double
counting problem. This property of money may be the only one that makes it distinct
from other "public goods". This could probably be the consequence of money being the
medium of exchange.
8. Removal of interest and all its derivatives (i.e. lending on interest, money market and
speculation) from an economy will lead Islamic banks to finance investment projects
through PLS. The criteria to be used by such banks are both profitability and feasibility of
the projects. Hence, projects compete with each other on the bases of their Internal Rates
of Return (IRR). However, the criterion used by a potential investor is IRR of a specific
project. The role of the central bank in determining arrays of IRRs for different sectors
and various activities is highly valuable in channelling resources into proper projects.
Ranking IRRs in descending order, an investor would first choose the project with the
highest IRR. However, the rule, which seems appropriate in choosing the amount to be
invested, is "cut-off rate". The maximum amount one investor is willing to invest in a
project is determined by the IRR of the next project whose value is almost equivalent to
the chosen project, without it being "the opportunity cost" of capital.
Cut-off rate, seems to me, has long been mistakenly interpreted as opportunity cost. In
investment decision making most of the times we are ~ dealing with the cut-off rate
concept (even in an interest based economic system) but very rarely with opportunity
cost. In capitalistic system, rate of interest is justifiably used as the opportunity cost of
capital. It is well justified that interest rate is essentially determined independently from
the rate of return in the real sector of the economy. However in the absence of interest,
projects compete with each other to obtain finance from Islamic bank on the basis of their
IRR because there is no other alternative. Comparison among various IRRs brings about

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the role of cut-off rate without anyone of them becoming opportunity cost of another
project. Cut-off rate functions as a signal to show an investor up to what point he should
invest and where to stop and select another project. Interdependencies among various
investment projects produce cut-off rate the special character and function of which differ
from those of interest rate.
The reason, seems to the author, that we often fail to distinguish between these two
concepts is the interdependence condition. Furthermore, choosing one, IRR of one project
as the opportunity cost of another project in the same activity (on the basis of the
principle of next best alternative) will lead one to a whole range of so-called opportunity
cost list, none of which have possibly the same value. Hence, different cost calculations
in the same activity. Whereas cut-off rates could be numerous for many producers in the
same activity without making them run into any problem.
In the absence of interest rate there is nothing to compare IRR of an investment project
with. Therefore, we can conclude that in an Islamic economy opportunity cost of capital
is zero. The foregoing statements were justified on the basis of economic logic;
accountants do not seem to have any reason to believe otherwise. One final remark can be
added to above statements. Opportunity cost of capital can also be used as the cut-off rate
but the reverse is not true.
After their feasibility and profitability have been confirmed by Islamic bank's qualified
personnel, projects become eligible to obtain finance; furthermore, the projects
themselves become collateral for finance. Central bank's role in providing guidelines
about both of these two aspects will certainly be appreciated by Islamic banks.
As long as there are unemployed factors of production suitable to be utilized in
investment, projects have to be financed by Islamic banks no matter how much money is
required to finance them. This gives appropriate apparatus to materialize the assertion
made by S. M. Bagher Sadr when he says; "Tools of production are treated servants in
Islam and man the master". It is the right of labour, in Islam, not to be kept unemployed.
In the final analysis, every piece of bank note coming out of an Islamic bank in response
to financing an investment project can be called Certificate of Asset Building (C.A.B.).
These C.A.B.'s are appropriate both to production and household sectors.
9. In dealing with various modes of contract, Islamic banks finance profitable and
appropriate projects. Appropriateness of projects are expected to be determined by the
central bank; however, to determine which projects are more profitable to finance is the
task of each individual Islamic bank. Central bank's task is to instruct Islamic banks to
give priority to those projects, which are more compatible with the country's economic
plan (be it either explicit and written or unwritten and implicit).
Islamic modes of contract can be classified into two broad categories:
1. Those with variable return and (2) with fixed return. Musharakah and Mudarabah
contracts fall into the first classification and Instalment Sales, Hire-Purchase, Joalah, and
the like into the second one. Musharakah (i.e., PLS) has well and rightly been recognized
as the core of Islamic banking. In Mudarabah contract labour has no responsibility as to
any loss that may occur provided that it had done its best. The second class of contracts
may be defined as auxiliary contracts, which could be used in conjunction with and after
the first category has been utilized. Risk is involved with the first type but the second is
risk less which is more appealing to Islamic banks. To reduce or even to eliminate the
burden of risk from the shoulders of investors it requires another paper, which IS beyond

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the scope of this presentation.
However, to make sure that the guideline controlling the complementarity of the second
type contracts has properly been observed, the Islamic central bank is supposed to keep
close eye on the contracts signed by each individual Islamic bank. I skip going into the
mechanism of how the burden of risk can be lessened or even eliminated; to determine
the degree of risk in different sectors and regions throughout the country. This is another
crucial task of an Islamic central bank. This will facilitate the task of Islamic banks in
determining the relative share of their own profit vis-à-vis that of the investor. This task
not only is beyond the capabilities of an individual Islamic bank, but also provides a
uniform procedure for all Islamic banks for various sectors, locating in different regions
of the country.
10. Whether an Islamic bank uses the variable or fixed- rate-of-return contract,
accountants are very keen about costs that are supposed to be deducted from, total
revenue. Accountants who are responsible to approve and submit both balance sheets and
profit and loss statements to tax authorities do not accept anything under the heading of
cost from neither of the two types of contracts provided that they have been financed by
Islamic banks. It is a fact that economists use these two valuable documents for economic
analysis and their own interpretations without being able to adjust them on the basis of
their own interpretation of cost. Nevertheless, neither of the two professions (accounting
and economics) can deny that the Islamic banks' share of profit paid by investors (i.e.
financees) is in fact sort of dividend which is essentially determined after all costs have
been subtracted from revenue and hence can no longer be considered cost.
To sum up the role of a central bank in an Islamic state, we come up with six different
crucial functions to be performed at different levels of rigorousness:

a) Active participation in the process of preparing economic development plan.

b) Informing individual Islamic banks about the priorities of investment projects as
outlined in the country's economic development plan at different regions and various
sectors.
c) Calculating and submitting to Islamic banks the profit shares of banks relative to those
of capital for different projects at various regions and sectors.
d) Calculating and submitting to Islamic banks the value of risk involved in different
projects, different regions, and various sectors of the country.
e) Constant inspection and supervision to make sure that projects have properly been
financed relative to the priorities and the value of risks.
Note: To do all above functions effectively an Islamic central bank is supposed to be well
equipped with highly qualified personnel in portfolio and risk management and project
appraisal. This is also a must for each individual Islamic bank.

f) After making sure that Islamic banks have concisely followed the central bank's
instructions they can safely be allowed to gradually reduce RRR down to zero.
Let me admit that monitoring cost in Islamic banking compared to the conventional
banking is relatively high. However, potential benefits as to its effects on reducing
unemployment and keeping prices constant over-shadow the cost. Most important,
distribution of income and wealth is expected to be more equitable than otherwise. Such a
scheme of distribution guarantees sustained economic development. The role of an

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Islamic central bank in a uniform distribution of information and prevention of moral
hazard cannot be overstated.
Whether it is the Islamic banking or the realization of Keynes' expectation to reach full
employment, it is yet to be seen. In closing my presentation, I would like to cite what
Keynes has to say about this whole issue: "If I am right in supposing it to be
comparatively easy to make capital goods so abundant that the marginal efficiency of
capital is zero, this may be the most sensible way of gradually getting rid of many of the
objectionable features of capitalism."
Nonetheless it seems that these two models, in the final analysis, converge. He, in this
respect, admits that "...it is to our best advantage to reduce the rate of interest to that point
relatively to the schedule of the marginal efficiency of the capital at which there is full
employment."

The Economic Challenge for the Ummah

by Justice Mufti Taqi Usmani
The nineteenth century was a century of political oppression whereby the powerful
Western nations enslaved most of the Asian and African nations including a large number
of Muslim countries. The present century, which is nearing its end, has witnessed the
gradual independence of these countries from Western imperialism. However, despite our
apparent success in achieving the goal of political liberty, we could not succeed in
acquiring independence on intellectual, economic and strategic levels. That is why
Muslim Ummah could not yet reap the fruits of its political freedom.
Now the Muslim world is looking toward the coming century with hope that it will bring
for it total independence in the real sense so the Muslims may find their due place among
the nations of the world and may be free to live according to the Quran and the Sunnah of
the Prophet, Sall-Allahu alayhi wa sallam.
However, this hope cannot be realized through wishful dreams. We will have to work
hard for our total freedom even more than we did for our political freedom. We need a
total revision of our strategy, a well-considered plan, a collective resolution, and a
revolutionary approach. In this paper, I would like to confine myself to two major issues.

Self-Imposed Dependence
Dependency on foreign loans is the basic disease of our economy that has not only
shattered our economic life, but has also devastated our self-determination and has forced
us to submit to the demands of our creditors, sometimes, at the price of our collective
interests. It is no secret that the creditors impose their own conditions before they
advance a loan. These conditions keep us under a constant foreign pressure, often stop us
from pursuing our own objectives and force us to follow the policies dictated by others.
The evil consequences of dependence on foreign loans are too obvious to need any
further elaboration.
Islamic teachings consider "Indebtedness" as a detestable phenomenon, which should not
be resorted to except in cases of extreme necessity. The Prophet, Salla-Allahu alayhi wa
sallam, even refused to offer the funeral prayer for a person who died before paying back
his loan.
Moreover, the Muslim jurists have discussed whether it is lawful for the ruler of a
Muslim State to accept the gifts offered by a non-Muslim. The answer: It is lawful only

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where the acceptance of gifts does not result in any kind of pressure against the interest of
the Ummah.
Islamic principles require that the Muslims should avoid incurring foreign debts, even if
they face some hardships. But our present indebtedness was not created by lack of
resources. In fact, the Muslims have never been so resource-rich. They own enormous
natural resources. They occupy important strategic positions on the globe. They are
joined together by a geographical chain from Morocco to Indonesia, broken only by India
and Israel. They produce nearly 50% of the oil of the world. They are said to account for
more than one third of the world's export of raw material. What is more, the cash they
have invested in the western countries alone may be more than sufficient to set off their
total liabilities.
According to a recent report of Islamic Development Bank, the total external debt of the
IDB member countries in 1996 amounted to 618.8 billion dollars. The deposits and assets
kept by the Muslims in the Western countries are said to be much more than this amount.
Obviously, there is no authentic record of such deposits, because their owners do not
disclose them. However, the economic experts have estimated them to be between 800
and 1000 billion dollars, out of which 250 billions are said to be taken back by the Arabs
to their own countries after the Gulf War. Practically it means that we are borrowing a
part of our own money at a high rate of interest.

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Even if these estimated figures are taken to be exaggerated, one can hardly deny the fact
that had these huge amounts been kept and properly used within the Muslim world, the
Ummah would have never resorted to incur the debt of more than six hundred billion
dollars. Our dependence on foreign loans is self-imposed for which we cannot blame
anyone but ourselves. We did never probe in to the factors underlying the flight of our
capital. We did never try to remove those factors and instill confidence in our own
people. We could not deliver ourselves from the corrupt and oppressive system of
taxation. We were not able to create a peaceful atmosphere for investment. We could not
provide our countries with stable political system. We did not bother to create
opportunities for the sound utilization of capital and, above all, we failed to mobilize the
spirit of Islamic unity and to activate the strength of the Muslim Ummah as a whole.
The tragic situation cannot be corrected by expensive celebrations at the advent of the
new century. We will have to take the challenge of time seriously. Our economic and
political leadership will have to find ways and means to free ourselves from dependence
on foreign countries. We already have the basic resources for that. All we need is to
design new policies to utilize the wealth of the Ummah within the Muslim world, and to
develop the concept of Islamic brotherhood and mutual understanding and cooperation.
The Quran says: "All the Muslims are brothers." Quranic injunctions and the Prophetic
teachings require that the Muslim Ummah should act as a single body. The geographical
barriers should not divide them into different nations with conflicting objectives. The
political boundaries may only be tolerated for the internal administrative affairs of each
country, but all the Muslim countries must have a united face at least with reference to
the common objectives of the Muslim Ummah vis-à-vis the rest of the world.
Gone are the days when technical know-how was the monopoly of a few Western
countries. Now, the Muslim talent is capable of at least handling the immediate
requirements of the Ummah. What we need is to seek this talent, and to put it to the
service of this Ummah with a missionary zeal.
But all this requires the unified efforts from the leadership of our countries. This is the
biggest challenge faced by them. They must meet it, not only for the betterment of the
Ummah, but for their own survival. A great responsibility, in this respect, lies on the
shoulders of OIC.

Restructing our Economic Systems

The twentieth century has witnessed the rise of communism, the conflict between
capitalist and communist countries and lastly the fall of communism. The capitalist
Western countries are celebrating the fall of communism as if it was an empirical
evidence of their own victory, not only on a political front but also on ideological plane.
The fact is, however, that communism was based on an emotional reaction against some
evil consequences of the capitalist economy, specially, against the element of inequitable
distribution of wealth, which has been experienced in the capitalist countries throughout
the centuries. The failure of communism was not due to its justified criticism of the evils
of capitalism. Rather it was caused by the inherent defects of the alternative system
suggested by it. The capitalist economies still suffer from inequities in the distribution of
wealth. There is still a large gap between the haves and the have-nots and 'poverty in the
midst of plenty' is still the major problem of their economy. These are the real problems
created by capitalism and unless they are satisfactorily solved, it may give birth to

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another reaction that may be more aggressive than communism.
The world, therefore, is badly in need of a Third Economic System. The Muslim Ummah
can work out this system based on the Islamic norms. The economic principles taught by
the Quran and Sunnah of the Prophet (Sall-Allahu alayhi wa sallam) are quite capable of
solving the major economic problems faced by the world today. While they allow private
ownership and market economy, they also provide a well considered system of
distributive justice, which may eliminate the inequities and bring about a system in which
profit motive works with the collective interest of the society. The basic fault of
communism was that, frustrated with the inequity of capitalism, it assailed the very
institutions of private ownership and market forces and developed a utopian idea of
planned economy which was unnatural, artificial and oppressive. The denial of individual
liberty curtailed the zeal for production and the wide powers of the state left the destiny
of the people in the hands of the ruling class.
It was neither private ownership nor the institution of market forces that was the basic
cause of injustice in the capitalist system. The basic factor for creating inequities in the
capitalist countries was the absence of a criterion to differentiate between just and unjust
earnings.
The system of interest favors the rich industrialists who benefit from the wealth of the
common people who deposit their savings in the bank, and after making huge profits do
not allow the common people to share these profits except to the extent of a fixed rate of
interest that is again taken back by them as it is charged to the cost of production. At
macro level, it means that these rich people always use the money of depositors for their
own benefit and in reality pay nothing to them because the interest payments are always
added to the cost of production. Similarly, gambling is a major instrument for
concentrating the wealth of thousands of men in a few hands and for promoting the
disastrous motive of greed for the unearned income. The speculative transactions are also
a major source of disturbing the natural market operations and contribute to the inequities
in the distribution of wealth.
Islam not only allows the market forces but also provides mechanism to keep them
operative with their natural force without their being hindered by monopolies. It applies
two types of controls on the economic activities.
First, it subjects the process of earning to certain divine injunctions, which clearly define
the limits of halal and haram. These injunctions tend to prevent monopolies and curb the
unjust and immoral earnings and commercial activities detrimental to the collective
interest of the society. In the context of modern economic needs where the savings of the
common people are activated to boost development, the use of the Islamic instruments
like musharakah and mudarabah, instead of interest, may make the common people
directly share the fruits of development which may bring prosperity in a balanced manner
reducing the gap between the rich and the poor.
Second, the institution of zakat, sadaqat, and certain other financial obligations provide
that even the halal income is again distributed to the persons who could not earn enough
due to insufficient market opportunities. Through the twin controls, the wealth is kept
under constant circulation and the chances of its concentration are almost eliminated.

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But our main tragedy is that the principles of Islamic economy are still in theoretical form
for which no living example is available. The Muslim countries have not tried to structure
their economy on Islamic basis. Most of them are still following the capitalist system and
that too in a half-baked manner, which has made the economic atmosphere much worse
than that of the developed capitalist countries. Unfortunately, despite having the clear cut
Islamic injunctions, the inequities existing in Muslim countries are far more severe than
in the Western world.
This tragic situation cannot last forever. If we are not prepared to mend our ways, some
natural process of revolution is bound to find its way. If we want to avoid disastrous
consequences of such revolution, we'll have to restructure our economic system on the
basis of clear guidance provided by the Qur'an and Sunnah. Our success in setting an
example for implementing the Islamic principles will be our best gift to the human
fraternity at the advent of the new century. I hope that if the principles of Islamic
economy are implemented sincerely, we'll find the world more receptive to them today
than we experienced it in the past.

COMPARATIVE ADVANTAGES OF ISLAMIC BANKING AND FINANCE

Mohammad Nejatullah Siddiqi
It is more than a quarter century now when the practice of Islamic banking and finance
began in earnest. The Dubai Islamic Bank, a private company, as well as the Islamic
Development Bank, a symbol of the Muslim peoples’ endorsement of the idea launched
by the Organization of the Islamic Conference (OIC), were both established in 1975. The
idea is maturing, the numbers are growing, and the market share is increasing. There
must be something that sustains it in an environment overwhelmingly dominated by
conventional finance. What could it be?

Not all Muslims are fully satisfied by the character and performance of the existing
Islamic financial institutions. Barring the small minority who sees no need for them, most
express dissatisfaction either on the ground that they are not Islamic enough or because
they are inefficient as compared to their conventional counterparts. But all agree that
these deficiencies could be remedied overtime and there is nothing to justify aborting the
experiment.There must be some reason for this resilience. What is it?
There had been a widespread fear that the dominant interests in the field of money,
banking and finance would soon gang up to kill the initiative. They would do so, it was
alleged, so that the lucrative markets peopled by Muslims do not slip out of their hands.
Nothing of that sort has happened yet, and does not appear to be on the cards. On the
contrary large vested interests in the continuation of the Islamic financial movement have
appeared involving conventional money managers. Why?

Last, but not the least in significance, is the fact that, out of the small number of western
professional economists who found time to pay some
Serious attention to the phenomenon, most have been very positive about it. In an
intellectual environment in which hardly anything originating in the
Muslim world is seen to be bearing some promise and looked at with respect, this calls
for some explanation.

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It is my intention today to share some thoughts with you in search of the answers to the
questions posed above. I do not know all the answers. I feel some of the questions call for
empirical data not yet available and for field surveys not conducted till now. Yet the
questions themselves are interesting enough to deserve your attention. Any time and
energy spent in search of answers to these questions will be well rewarded as they may
indicate the future agenda for research for the nascent scientific discipline of Islamic
economics.

Search for a Better System of Finance

There are three contemporary phenomena which, in my opinion, provide clues to what
we are looking for. The first is the widespread dissatisfaction with the performance and
consequences of the monetary and financial sector all over the world since the end of the
world war two, specially since the 1970s. The second is the fact that the Islamic financial
movement appeared on the scene as an offshoot of a much broader resurgence among the
Muslim peoples. And the third factor that could partly explain the above mentioned
resilience and hope invoked by the Islamic approach to money, banking and finance
could possibly be the strong moral overtones accompanying it since its inception.
Let us examine these points one by one.
There is a widely shared perception that there is much more inequality in the distribution
of income and wealth today than at any other time in the entire past of mankind. This
applies to the distribution within nations as well as between nations. Worse still,
inequality is growing and there is nothing on the horizon to indicate a reversal in this
trend. It is rightfully regarded as a potential threat to peace and a phenomenon
unbecoming of human fraternity.
At least part of the blame for bringing this about is laid on the monetary and financial
system as it evolved during the past half century. While a detailed analysis of that system
is not possible in the context of our deliberations today, some reference to the main
factors is in order.
At the top of the list is the opportunity the current system provides for money to be
exchanged for more money, making the moneyed richer. Next in importance is the
immense scope for gambling-like speculation provided by the huge volumes of debt-
based securities in a system that permits sales on margin, short selling and other exotic
money games. Last but not the least is the philosophy that regards profit maximization as
the only legitimate concern of the investment managers to the neglect of all the other
ingredients of human weal. Add to these perennial features of capitalism its newfound
energy with globalization and deregulation and the consequences should be surprising to
no one.
As it stands, the performance of the system is generally regarded to be suboptimal. The
monetary and fiscal policies recommended to improve the system’s efficiency are often
complicated and unconvincing. Some of them may be politically impossible to
implement. In this situation any simple and straight forward approach like that of Islamic
economics is bound to attract attention.
The manifold increase in GNPs and the general uplift in standards of living in most if not
all parts of the world, matches uneasily with, if it is not altogether negated by, the
colossal rise in levels of anxiety caused by the increased instability of the system
accompanied by volatile exchange rates and, in some cases, collapsing currency values,

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and frequent job losses. These undesirable consequences and the, at the best, mixed
performance makes thinking people look around for alternatives.

Attractive Features of the Islamic Approach

Islamic resurgence in the twentieth century assumed proportions nobody could afford to
ignore. Whether one leaned towards a possible clash of civilizations or hoped that
interfaith dialogue would help usher in a happy age of coexistence in the global village,
Islam was there as a major factor on the world scene. And the Islamic financial
movement happens to be one of the unique features of twentieth century Islam. The fact
that its rise coincided with the Muslim countries’ coming out of colonial rule speaks
volumes about its place in the Muslim psyche. It is as much an expression of their distinct
identity as any other symbol of independence, but there is a distinction no other symbol
shares with it: It is meant for all. As Islam permeates deeper in contemporary Muslim
societies, by accommodating what is new but useful and shedding what accompanied it
for long but was not essential, the significance of an Islamic approach to such a mundane
affair as finance dawns on all concerned. After all it was a moral approach to mundane
affairs that was the essence of the Prophet’s mission. Anyone who takes Islam seriously
can hardly ignore the moral approach to money, banking and finance represented by this
new phenomenon. That makes every Muslim a stakeholder in this venture. The same
feature makes outsiders give a greater weight to the enterprise than its current size or
volume would call for.
A return to ethics and morality is on the cards. Disillusionment with an amoral approach
to economics and exasperation at the excesses of secular-materialistic-hegemonic policies
of politicians has created a new environment. The ‘end of history’ triumphalist phase is
over. People, including the intellectuals, are willing to listen. Is a moral approach to
economic activity possible? Is it possible to define distributive justice in terms which take
into account not only the immediate and the actual, which is often affected by things
transient and insignificant, but also in terms of things essential and durable which relate
to the core of the human situation? Is it desirable to manage money, banking and finance
in total indifference to such problems as poverty, unemployment and increasing levels of
anxiety? The fact that the Islamic financial movement claims to be based not on a fine
stroke of human ingenuity but on divine guidance and prophetic insights makes it
disarmingly simple. Alone in an age marked by its scepticism and uncertainties, the
Islamic financial movement commits itself to a sacred text. To do so in matters economic
leaves many gasping for their breath. But the fact that the text is not the handiwork of
victors in a war or champions of a particular class, the fact that it is supra-human,
introduces an attraction no other school of thought can muster. For, whatever the
difficulties faced in drawing guidance from a text revealed in the seventh century for life
in the twentyfirst century, it could not possibly be seen promoting the interest of one
group of people at the cost of the interest of others. The universal nature of the teachings
of Islam relevant for finance, be it prohibition of Riba (interest) and Maysir (gambling) or
the obligatory share of the poor in the wealth of the rich (Zakat), could hardly be doubted.
But did the movement really demonstrate in practice its ability to fulfil the promise of a
moral handling of money, banking and finance that it bears by virtue of its being rooted
in religion? That, of course is a different question, one which needs some research before
it can be answered. The point I wish to make at this stage is, the very promise raises

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hopes no other approach has been able to raise.

Islamic Finance in Practice

Raising hopes in a desparate situation can take you along part of the way but not all the
way. What could sustain Islamic banking and finance till now can hardly be expected to
guarantee its continued progress in the future. It is one thing to capture a large chunk of
the market in your home base, i.e. the Persian Gulf region, it is a different task to attract
customers in the global market place. So, where do we go from here?

Comparative Advantage
Pursue your comparative advantage, seems to be the right answer. I would list it as the
following.
Islamic finance forges a closer link between real economic activity that creates value and
financial activity that facilitates it.
Islamic finance does not allow creating new risks to profit thereby.
Islamic finance is global and cosmopolitan.Having committed itself to a text
accessable to all and Prophetic precedents available easily, Islamic finance is open to any
innovations that are in congruence with its fundamentals. It is not a closed system. It has
no regional, ethnic or class affiliations.
It may be argued that some of these advantages need state sponsorship to be pursued
effectively. That is true, but before we take up the issue of state sponsorship let us note
that the real source of srength for Islamic finance has always been private initiative. Once
a framework for proper exercise of property rights and management of economic
enterprise was in place, individuals were left free to organize business the way they liked.
When someone felt any need for clarification of a given text, or found oneself in a
situation in which no available text offered guidance, in his or her view, he or she
approached the Prophet who gave a ruling. When the Prophet was no more, people turned
to those who had been close to him. As time passed scholars collected these rulings and
developed a whole body of jurisprudence on their basis. Rules relating to finance are also
a part of the corpus so developed. But the remarkable thing is that there is nothing
‘official’ about this corpus. It was and remains till date the work of certain individuals
endorsed by other individuals, however large their numbers. Those actually involved in
financial dealings followed the ruling of their choice as dictated by their conscience and
their circumustances. As long as they operated within the framework defined by the texts
they enjoyed a great amount of flexibility in their operations. The state did not legislate
Islamic commercial law, hence the state could not enforce any particular rulings. The
state came into picture when a dispute between trading parties brought them to a court of
law, and the court took into consideration the particular rulings shared by the parties
which were, therefore, supposed to be the basis of their interaction.

The Islamic State and the Financial Markets

I am not claiming that the early Islamic state left the financial markets alone,
unsupervised and unregulated. Far from it. Like the market as a whole, whose supervision
and regulation dates back to the Prophet’s time, financial markets too were monitored
and regulated to ensure they operated within the framework of the divine guidance
mentioned above. The rich literature on Hisbah (market regulation ) bears witness to that.

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What I mean to say is that just as the Islamic state never took over the markets in general,
it never took over the financial markets. Though the society’s money, the payment
mechanism, soon came to be managed by the state in the same manner that it ensured
proper weights and measures, financial practices relating to investment, intermediation,
exchange of currencies, transfer of funds, securitization, etc. were all developed in the
open market by those engaged in the art.
I narrate this familier story to point out the vast scope Islamic finance , by its very nature,
provides for individual initiatives, innovations and experimentation. It is not a matter of a
given list of dos and don’ts being handed down to all concerned. It rather is a great quest
for justice, balance and felicity in our economic and financial life in which God gave us
some broad, eternal and universal guidanc. His Prophet led us further by applying that
guidence to the concrete situation of seventh century Arabia. It is always a challenge for
the faithful to act in accordance with divine guidance.Those who came after the first
generation of Muslims enriched our heritage by deriving more elaborate rules from the
divine texts and the Prophetic traditions applicable to a variety of lands and peoples. Of
course, they lacked the Prophetic immunity from error. Today in circumustances entirely
different, but armed by centuries of history, we are facing that challenge again. The
challenge lies not in conforming to a given set of rules but in realising the objectives of
the Shariah, for which the current generation of Muslims would have to do for
themselves what the earlier generation had done in their time and place.
It is in the nature of the arts that the artist alone knows the details of the job. The art of
business enterprise or financial management is no exception. The scholar can help. But
he should not aspire to take over the art doing itself. That may kill the art or stifle it. He
should rather be at hand to advise and look for any possible guidance the past may have
to offer.
Happily, the story of modern Islamic finance in the private sector is not very different.
The best of all the worlds will be for the practitioners of Islamic banking and finance to
internalize the Islamic values and proceed to do their job. They should turn to Shariah
scholars for advice when needed. But it is too much to ask them for blueprints for doing
things with which they are not the least familier. It is not only the scholar’s job but also
the job of the business and financial community amongst Muslims to forge ahead with
the distinct Islamic vision of finance in practice and bear witness to it through their
activity in the open market.

Need for Restructuring Islamic Financial Markets

Let me explain this with the help of some examples. I select Murabaha (cost plus)
financing and Mudaraba (financing by sharing the outcome).
We consider Murabaha to be superior to debt financing on a number of grounds. We also
consider that its inclusion in the toolbox of Islamic financial instruments makes that box
really capable of handling all financial situations. We claim that it serves to keep the
financial market in sync with the market for real goods and services, thus making it less
vulnerable to gambling like speculation. Demonstrating these and possibly other vurtues
require Murabaha to be practiced in real earnest, i.e. as a means of financing the
acquisition of means of production and needed goods by people who are expected to be
able to pay for them, but after sometime. It would be a caricature of Islamic finance if,
instead, Murabaha is used as a trick to do what conventional finance is doing, i.e. lending

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on the basis of interest. It is only the practitioner who can ensure that Murabaha does not
degenerate to that level.
Since financial intermediation does not involve selling goods and services directly, it
would be more appropriate to get financial intermedieries involved in Murabaha business
indirectly, as I will explain later. The same applies to other forms of business like Salam
(payment now for delivery of agricultural goods in future), Istisna’( prepaid orders for
manufactures ), leasing, etc. A financial institution is not fully equipped to handle these
businesses directly. It is often reluctant fully to expose its capital to the risks involved in
direct businesses. As a result it tries to make the transactions as risk free as possible. It
does not care if this means, on the average and in the long run, settling down for a lower
rate of return.
Now imagine a whole range of businesses doing Murabaha, Salam, Istisna and leasing.
These businesses would know the risks they are taking. They would also be able to
diversify their activities as a means of reducing risk. Perhaps they are already
specialising in handling different market segments in terms of the commodities involved.
These businesses would need financing. This financing could come from Islamic
financial institutions. This way there would be a buffer between the changing
circumustances of real businesses and those handling only finance. It will thus relieve the
Islamic financial institutions from the need to reduce risk by making their contracts look
like payment of less money now in exchange of more money to be received in future. The
fact that their stake will be not in indivdual deals based on one of the contracts mentioned
above but in a large basket of deals will make a crucial difference. In its own interest, the
business being financed will have reduced the risk of loss by diversification and other
methods. The financial institution will have the added opportunity of diversification by
offering its funds to a variety of businesses.
What would be the basis for the Islamic financial institutions’ financing of Murabaha
companies, Leasing companies, etc.? In my opinion the most appropriate form will be
Mudaraba or profit sharing. Islamic banks accepting people’s savings in their investment
accounts on the basis of Mudaraba would be giving that money out on the basis of
Mudaraba. This conforms to the earliest form of financial intermediation discussed in
Islamic jurisprudence, al mudarib yudarib ( One taking other person’s money on the basis
of Mudaraba giving that money to yet another person on Mudaraba ). The risks involved
will be financial risks which financial intermediaries have learnt, and continue learning,
how to handle. Business risks will become the concerns of business houses closer to
those who buy and sell, even produce and import/export, or build and lease, hire and
sublet, etc.There will be no need to twist and turn a trade deal to make it serve the
purposes of a financial intermediery.
One might need to encourage establishing a whole range of companies: Murabaha
companies, Salam/Istisna companies , Leasing companies, etc. so that finance is
channeled from Islamic banks to those actually engaged in production of wealth. Whether
it is the building and construction sector or agriculture, manufacturing industries or the
transport and communication sector, foregin trade or domestic commerce or the
government’s infrastructure building activities, ways can be found to meet their financial
needs through these companies, without recourse to interest based lending and
borrowing.
This vision, which involves separating purely financial transactions from business

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transactions, has two advantages in comparison to what we actually observe today in the
Islamic financial markets. Firstly, it would comprise a mixture of sharing based modes
with trade based modes of financing that result in creating fixed payment obligations or
debts , unlike the current situation dominated by trade based modes. Secondly, it will
enable Islamic financial institutions to do needed long term financing, a field from which
they are presently shying away. With the exception of istisna which can be a basis of
long term financing, all other trade based modes of finacing,e.g. Murabaha, leasing and
salam, are suitable only for short term financing. Given this change they could rightfully
demonstrate how their activities avoid contributing to the instability of the system,
something we accuse interest based institutions of doing. By doing this the system will
enjoy the unique feature of sharing based intermediation: syncronization between
revenues and payment obligations, and still retain the flexibility which the presence of
very low risk modes of financing impart to a system. A strong presence of sharing based
modes of financing will give credibility to the claim of Islamic financial system’s being
more just than the conventional system.
Above I have summarized the comparative advantage of Islamic banking and finance in
three things: It keeps the financial sector in sync with the real sector, it is less vulnerable
to gambling like speculation, and it is cosmopolitan and universal. The first two features
contribute towards greater stability, among other things. The third makes it far more
suited to the global village than the curent system suspected of being partial to the
developed countries of the west.The claim to impartiality and cosmopolitanism will be
credible in sofaras the system is perceived to be rooted in divine guidance. I think a
restructuring of the Islamic financial markets along the lines suggested above will go a
long way in enabling that market to demonstrate these distinctive features and thereby
attract more adherents.
Much of this restructuring can be accomplished in the private corporate sector. To the
best of my knowledge some of it is already under way in the form of new subsidiaries
and syndicates. But it can take the Islamic financial movement a long way ahead if the
state in Muslim countries shows awareness of the Islamic approach to economic life in
general and to money, banking and finance in particular. The moral approach to worldly
wealth, to what Alfred Marshall called the ordinary business of life, is not unique to
Islam. All religions are supposed to share it. Even in the so called materialist western
society the common man can not possibly be amoral, not to say immoral. The problem
lies with economics as a scientefic descipline which refuses to admit ethics and morality.
It is not possible to elaborate on this point in this paper. It is noted here to underline the
need for Islamic economics in an Islamic society which wants to Islamize its financial
markets. The major failure of capitalism noted above, that it promoted inequality between
nations and within nations, can not be remedied merely by introducing Islamic finance. It
requires behavioral changes on part of all economic agents, the individual consumer and
producer as well as the state.

The suitability of the Islamic finance for the global village and its superiority over
conventional finace does not lie in the opportunities it might offer for the moneyed
people to make more money through investment. Rather it lies in its promise to ensure
that good returns to investments shall be accompanied by promotion of the good of the
socity as a whole. A combination of efficiency with morally better end results requires

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that institutional changes be accompanied by moral regeneration.

Need for Fundamental Research

The role of the state in pursuing the comparative advantages of Islamic finance does not
lie only in removing legal hurdles in the way of Islamic financial practices and enacting
laws enabling the adoption of such practices. It does not end with the setting up of proper
regulatory mechanisms and reform of the central bank. Rather the Islamic state should
aspire to project the moral approach to economics and finance on world forums as well as
in its domestic policies. That , I think , is not a call for implementing a given set of dos
and don’ts. Such a set defined in today’s terms does not exist. No individual or state has
the wherewithalls of defining it alone in isolation with the rest of humanity. The
formulation of a just and equitable set of economic and financial arrangements for the
global village of the twentyfirst century should be a joint human enterprise in which
Muslims, individuals as well as states, should vigorously participate. A beginning has
already been made by the launching of the twin projects of Islamic economics and
Islamic finance. The need of the hour is to redirect more resources to these projects so
that they attract more and more people.
Above I have noted the positive response the idea has received from some of the faculty
members in western universities. But so far our reach to western academia has been very
limited. To reach more people we need scholarships, research grants and endowed chairs
for Islamic economics/Islamic finance in the leading universities .There is a good case for
the Islamic financial institutions taking a lead in this respect.
In line with the three bases of our comparative advantage, relating to real-financial
linkage, reducing speculation and focusing on the interests of mankind in general,
researchers should give priority to the relevant contemporary practices and think of
alternative ways of doing things expressive of these advantages. Also our practitioners
should eschew methods fostering money games with no links to goods and services,
speculation based on risks enginered by the speculator, and those serving one section of
people at the cost of others. It is in the nature of financial systems that no community can
have one in isolation with the rest of the world. Just as we can not ensure an unpolluted
environment for ourselves unless we try to clean it for every one, we can not have a just
and equitable financial system for the Muslim peoples of the world unless we take others
too onboard. That requires as much doing as thinking and persuading. Let that be our end
note for the day.

Benefits of Islamic banking

By K.H.Azam Ahamed
Islamic banking and the finance industry is growing at an annual rate of 20%. Many
international as well as local institutions have stepped into this multi-billion dollar
booming industry by establishing its Islamic wings and units. International giant banks
such as HSBC (HSBC Amanah), Citi Bank (Citi Islamic) and Standard Chartered have
already established their Islamic units and functioning in the Middle East region.
In Sri Lanka, despite the Muslim population being just 8% of the total population, a
considerable growth is reported in the past few years with the establishment of Amana,
Ceylinco Profit Sharing, First Global and a new comer ABC Barakah. Recently it is
reported that the largest state owned commercial bank, Bank of Ceylon intends to

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commence its Islamic banking unit in early 2008. All these new entries imply that this
alternative banking system has drawn the attention of Muslims as well as non-Muslims
due to its unique developmental characteristics.
The underlying principle of Islamic banks is the principle of justice which is an essential
requirement for all kinds of Islamic financing. In profit sharing of a financed project, the
financier and the beneficiary share the actual or net profit/loss rather than throwing the
risk burden only to the entrepreneur. The principle of fairness and justice requires that the
actual output of such a project should be fairly distributed among the two parties. If a
financier is expecting a claim on profits of a project, he should also carry a proportional
share of the loss of that project.
In contrast with conventional finance methods, Islamic financing is not centered only on
credit worthiness and ability to repay the loans and interest; instead the worthiness and
profitability of a project are the most important criteria of Islamic financing while the
ability to repay the loan is sub-segmented under profitability.
One of the unique and salient characteristics of Islamic banks is that the integration of
ethical and moral values with its banking operation. The ethical and moral consideration
of Islamic banks cannot be detached and their behavior should be consistent with the
moral and ethical standards laid down by the Islamic Shari’ah.
Unlike the conventional banks, the financing of Islamic banks are restricted to useful
goods and services and refrain from financing alcoholic beverages and tobacco or
morally unacceptable services such as casinos and pornography, irrespective of whether
or not such goods and services are legal or not in a given country.
In contrast with conventional banks, Islamic banks do not consider only the credit
worthiness and interest rate as standards; instead they must apply Islamic moral/ethical
criteria in their provision of financing. This adds another merit for Islamic banks since
there is a benefiticial impact on the productivity in the economy as it reduces the social
and economic cost of such harmful products and activities.
Another important characteristic which forms the basis for the development of Islamic
banks is the relationship with depositors. They deal with their customers on investment
grounds rather than a pre-determined fixed interest rate. They invest the money of their
depositors on high profitable projects after going through a strategic analysis in order to
give a substantial return to their depositors.
Thus in Islamic banking industry, each bank will attempt to out-perform other banks if it
wants to attract funds from investors. And the ultimate result is that a high return on
investments for the investors, which is unlikely in a conventional bank where it deals
with their depositors on a pre-determined fixed interest rate.
Furthermore Islamic banks eliminate the barrier between those who save and those who
invest, and bring them closer to the real market. The nature of the financial
intermediation of Islamic banks significantly defers from conventional banks and it is in
harmony with real market and developmental changes in it.
It is important to highlight some of the challenges faced by the Sri Lankan Islamic banks.
Although there are many, the most important challenges are the lack of Islamic banking
professionals and the lack of Shari’ah scholars who have specialized in Islamic
economics. Further the Shari’ah board should have a fair influence on the bank’s
operational and strategic planning. For this process to be successful, the Shari’ah boards

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of our Islamic banks should absorb Islamic scholars based on their technical expertise
rather than their popularity.

Islamic Banking Is Not Islamic

This is clearly stated in the Holy Koran 2:278 and 279: “O ye who believe! Fear Allah
and give up what remains of your demand for riba, if ye are indeed believers. If you do it
not, take notice of war from Allah and His Messenger. But if ye turn back, ye shall have
your capital sums. Deal not unjustly and you shall not be dealt with unjustly.” I believe
that in those days as in some third world countries today, loans impose a backbreaking
burden on the rural poor. The reason is that there are usually one or two wealthy
individuals (usually a powerful landowner) in a village that can lend money. Eventually,
the borrower is reduced to serfdom because he cannot repay the debt. There is an
interesting description of wealthy landlord cum moneylender in VS Naipaul’s book,
“India: A wounded Civilization”. He wrote: “And in these villages, interest rates were so
high, ten percent or more a month, that debts once contracted, could never be repaid.”
The man he described was practically the master of the village, a kind of feudal lord,
more important to the lives of the villages than the central authorities. His house was
always full of grain. This gave him power. Villages who cannot repay became his
indentured labor. The villages had a deep reverence for this man. Nothing moved in the
village without his blessings. Yet he was a kind man who provided his villages with food
during shortages. But a less kindly man can easily abuse his power. To repay debt,
villagers in some parts of the world have been reported to sell their children into
prostitution. Thus the original prohibition against usury does have its justification and
wisdom. But for those of you who refuse to accept anything redeeming about Prophet
Mohammed, you can easily find another less honorable motive. Perhaps he was trying to
find recruits from among the impoverished indebted class by playing Robin Hood or Mao
Tse Tung. As the Indian central government sometimes find these
landlords/moneylenders to be obstructions for their development plans, the Prophet too
may have found his plans thwarted by this group of men. He may not have liked having
to share power with anybody. Take your pick of motives. But whatever the original
reason, this prohibition against interest is clearly out of date. The root cause of the
problem is that there are very few lenders. They are thus able to lend at high interest
rates. The nearest bank or village may be far away and even then nobody may be willing
to lend to the needy villager. Villagers may be illiterate and unaware of other sources of
financing. But in the modern world, there are many lenders. If a bank charges too much,
you go to another. Money flows across continents from lender to borrower at the touch of
a computer button. The interest rate you pay is very competitive and not jacked up
artificially by a monopolistic situation. Yet Muslims still struggle to satisfy the
conflicting demands of modernity and their faith. The result is the rise on Islamic
Banking which started in Dubai in 1975 and is today a $200 billion industry. Islamic
banking was not started to cater to a financial need but to a religious need. In theory,
Islamic banking is supposed to work like this: Depositors place their savings with the
bank whom then provide the funds to businessmen in exchange for a share of the profit
(or loss). This profit (or loss) is then passed on to the depositor. Interest may be forbidden
but profit is not. So what is the difference between profit and interest? The key difference
is that interest is fixed and certain whereas profit is not. Thus the more successful the

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project, the more the bank will earn and pass this down to the depositors. This is called
the Profit/Loss Scheme (PLS) and is considered just according to Islamic scholars. Not
sharing the profit with the bank and depositor is considered unjust. However, this plan
has some serious flaws. Remember, the higher the expected return, the higher the risk.
The chief flaw is that the bank and its depositors have to share in the risk of project
failure, which in the worst case may see the loss of the entire principle. The depositor
may be a pensioner who does not want to take risk. He or she just wants principle to be
assured and is contented with a little return (i.e. interest) for his bank deposit. If he is
willing to risk his capital in hopes for higher return, there are already instruments for him
to invest in. He can buy stocks directly or through trust funds. If he thinks George Bush is
going on a warpath against the Axis of Evil, he can buy defense contractors like
McDonald Douglas. If he thinks people are becoming more horny and sinful, he can buy
stocks in a condom manufacturer. There is no need to specially start Islamic banking for
these people when they are already well served. The Islamic Bank, however, does not
cater to the group of people who just wants the preservation of capital and are content
with a low interest rate. If all the world’s banks are Islamic, this group of people will
have to hide their money under their mattresses in order to ensure their capital is
preserved. But they have to spend lots of money on rat poisons and traps to make sure
their dollar bills do not get eaten. Somehow or other, Islam tends to bring people back to
the 7th century. I wonder why. Another problem is that under the PLS, there is an
incentive for the businessman who took the bank’s money to report a loss. That way, they
don’t have any profit to share with the bank. Can you see the irony? Under the kaffir
financial system, greedy and unprincipled managers are reporting profits when they are
making losses so that they can cash in on their share options. Under the amazing Islamic
world financial system, unprincipled businessmen will try to report losses when they are
making profits. This can be done by creative accounting. Let me give you a simple
example. Suppose that a date plantation owner needs financing to buy camel dung
fertilizer. The bank advances him the money in exchange for a share of the profit. He
uses it to buy dung from his dung merchant brother-in-law at an inflated price. This jacks
up the costs. He cannot make a profit from his dates because he bought grade F dung
instead of grade A. He does not owe any money to the bank, since his plantation is
making a loss but he splits the money with his crooked brother-in-law. To prevent fraud,
the Islamic banks must have a detailed knowledge of the businesses they invest in and
have a say in the management. In this case, the bank must be able to tell the difference
between grade A dung and grade F. In practice, it is impossible for a bank to acquire such
detailed expertise in such a wide range of businesses that banks deal in. Even if they
could, they don’t have the manpower to supervise management decisions. In the
conventional banking system, banks usually don’t get involved in management. Other
possible accounting tricks to reduce accounting profits include the following: 1)Early
recognition of expenses. 2)Late recognition of revenues. 3)Change from FIFO accounting
to LIFO accounting 4)Shortened amortization/depreciation periods 5)Reporting bogus
revenues. Etc In practice, Islamic banks are aware of this problem. A report by the
Institute of Islamic Banking and Insurance stated: “While designing an alternate to
interest-based system, it was realized that large scale resorting to PLS system of Islamic
banking could pose serious risks and hazards to Islamic banks due to wide-spread
tendency to adopt unethical accounting practices to conceal true profits, high rate of

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illiteracy and host of other reasons.” In practice most so called Islamic banking is not
truly based on the PLS. This means that depositors and the banks get fixed return for their
money. The common financial instruments are: 1)Muradaha (Cost-plus sale). 2) Deferred
payment sales 3) Purchase with deferred delivery 4) Leasing 5)Loans with a service
charge The most important is the Murabaha. This is how it works. The bank, at the
request of its client, buys some goods and resells the goods to a client at a fixed profit
(read interest) regardless of the success or failure of the client’s business. The payment
can be in one go or in installments over many years. The only risk that the bank take is
that the client cannot honor its agreement to pay up – same as in conventional banking.
Whether his client makes a lot or money or lost money, he is entitled to ask for his fixed
“profit”. So in spirit, there is no difference with conventional financing. It is the same for
the other instruments. The whole Islamic banking is an exercise in self-delusion. An
Islamic scholar, Justice Taqi Usmani said: “Islamic banks are using the instrument of
Murabaha within the framework of the conventional benchmarks like Libor etc. where
the net result does not differ from interest-based transactions.” He added: “When the
common people realize that the net result in the transaction of the Islamic banks is the
same as was in the transactions of conventional banks, they become skeptical towards the
function of Islamic banks. It therefore, becomes very difficult to argue for the case of
Islamic banking before the common people, especially before the non-Muslims who feel
that it is nothing but a matter of twisting documents only.” Commendably frank, the
Institute of Islamic Banking and Insurance wrote: “It is therefore, seriously apprehended
that if the present sad state of affairs is allowed to continue, even many innocent Muslims
may develop doubts about the feasibility, practicability and usefulness of the ‘Islamic
system of banking’ notwithstanding that the fault lies with us and not with the system.”
Personally, I think it is better for Muslims to say that the fault lies with the system and
not with themselves. They should stop kidding themselves and proclaim that lending
money for interest is part of the modern world and cannot be banned. But to say that
would be to admit that the system is flawed and then the whole edifice of Islam will come
crashing down. It is too painful to do that and you might get accused of blasphemy. So
Muslims will continue to bang their heads against the brick wall trying to make Islamic
banking work. That’s mission impossible.

Islamic Finance Offers Good Governance to Conventional Banking

Islamic finance, which borrowed features such as products from
conventional banks, can now return the favor by lending its set of principles
for good governance and responsibility, the Raja Muda of Perak, Raja Dr
Nazrin Shah said on Tuesday.
“To date, Islamic banks have borrowed from conventional finance in terms of
products.But, I think, the time has come where the flow of information and knowledge
can and should flow the other way as well,” he said in his keynote address at the second
day of the World Capital Markets Symposium, here.
He said Islamic finance could also help the global finance industry to be more aware of
following the rules and curtailing excess as well as create an infrastructure of honesty,
fairness and integrity.

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“But, I also believe Islamic finance can offer much more than this,” Raja Nazrin, who is
also the financial ambassador for the Malaysia International Islamic Financial Centre,
said.
“At its heart, Islamic finance is an ispiration towards good finance.As we have seen, good
finance is about trust, and trust is a cornerstone of stability.
“Therefore, I believe that Islamic finance can help break the vicious cycle of boom and
bust that has come to characterise global finance,” he said.
Islamic finance is now a truly global market, participating across borders with a vast
range of investment alternatives including sukuk, mutual funds, commodity funds, equity
traded funds, real estate investment trusts, shariah compliant derivatives and hedge funds.
Recent developments also included the possibility of an Islamic bank in France, the
publishing of a book on Islamic finance in Italian and shariah compliant real estate funds
in Australia.
There is also news of expected sukuk issuances from the United Kingdom, Australia and
Korea.
There have also been a diverse range of issuers of shariah compliant products including
the World Bank, the Islamic Financial Centre, the German state of Anhalt-Saxony,
Aston-Martin and Shell, which pioneered the sukuk.
“The world is interested and I believe Islamic finance to be up to the challenge,” Raja
Nazrin said, adding that the industry is growing with more demand seen from non-
Muslim investors, not only in Malaysia but also abroad.
He stressed that one of the most important goals of the Islamic finance industry should be
to integrate into the global financial system.
The global market for sukuk (Sharia-compliant bonds) has grown tremendously in recent
years. Total outstanding sukuk rose from $8 billion in 2003 to around $100 billion in
2008. Sukuk provides companies and governments with access to financing and liquidity
and offer a much needed Sharia-compliant instrument to investors. While the growth of
the fixed income market in the Kingdom has been dwarfed by that of the equity market,
we think that conditions are in place for strong growth in sukuk issuance and trading.
An important step was the launch by Tadawul of an automated order-driven secondary
market for sukuk in mid-June. Previously, sukuk transactions were in an over-the-counter
market, meaning that they were executed through bank treasuries and settled by Tadawul.
Liquidity was very low, as most sukuk issues were held until maturity. The introduction
of the new platform is intended to encourage investors to more actively trade sukuk. With
the new system, investors can buy and sell sukuk through their brokers.
With the new trading platform in place, we think the following factors will stimulate
supply from issuers and demand from investors in Saudi Arabia:
• Predictability and portfolio diversification: The collapse in the stock market last
year has encouraged investor interest in more predictable assets such as sukuk.
Given the very limited investment channels open to investors in the Kingdom,
sukuk could also play in important role in portfolio diversification.
• Problems raising finance from traditional sources: Companies needing to raise
finance have generally used a combination of bank loans and IPOs. With banks
reluctant to lend and low valuations making IPOs unattractive, sukuk issuance
should emerge as an important source of funding.

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 • Balance sheet mismatches: Little long-term bank lending is available, meaning
that companies borrowing to finance long-term projects face an asset-liability
mismatch on their balance sheets. Long-term sukuk would ease this problem.
• Healthy sukuk pipeline: Following two successful sukuk issues earlier this year,
other local companies have announced their intention to issue sukuk, in addition
to some GCC governments.
Notwithstanding the bright future for sukuk, there are still formidable challenges may
impede growth. Liquidity is very low; there were only 50 transactions in the first two
months of trading on the sukuk market. In addition, the local market lacks breadth and
depth (there are only five listed sukuk) and there are no indications that the government
will begin actively issuing sukuk (government support is generally a key factor in the
development of debt markets). Furthermore, the lack of skilled human resources, Sharia-
compliance standardization and innovative product development remain serious issues.
Background
Sukuk (plural of sak) are Sharia-compliant bonds. The main difference between sukuk
and bonds is that sukuk holders take direct ownership of an underlying asset or pool of
assets, whereas a bond is purely the financial debt of the issuer. Sukuk do not pay
interest; rather they generate a return through actual economic transactions in the form of
sharing or leasing the underlying assets. Nonetheless, in most other aspects sukuk and
conventional bonds are similar.
The use of sukuk has become increasingly popular in recent years both for governments
and companies. In part this has stemmed from the dramatic growth in Islamic banking
that has been the result of the large inflows of liquidity (primarily oil revenues) into the
Islamic world and a greater appetite among businesses and individuals to conduct their
finances in a Sharia-complaint way. As the take up of Islamic financial services grew,
demand from issuers for a product that performs a similar function to a bond leapt.
Demand from investors has also surged as growing wealth within the Islamic world has
made regional credit risk more attractive and greater understanding of the instrument and
clarity of documentation, supported by credit ratings from international agencies, has
enhanced investor comfort with sukuk.
Malaysia accounts for around 47 percent of global sukuk issuance by market value,
followed by the GCC, which is the source of a further 46 percent. Sukuk issuance is not
limited to Islamic countries and there have been issues from institutions in Singapore, Sri
Lanka, Canada, Thailand, the UK and US. Recently, the second largest bank in Russia,
VTB, indicated that it is considering a sukuk. The growing interest in sukuk worldwide
reflects the spread of Islamic banking and the desire of foreign issuers to tap the liquidity
within the GCC. As it is the structure of the instrument that has to be Sharia-compliant,
rather than the issuer or the purchaser, the supply and demand for sukuk is set to grow in
nontraditional markets.
Sukuk are generally built around one of six main contracts: Ijara, Mudaraba, Musharaka,
Murabaha, Istisina and Istithmar. Ijara accounts for around 32 percent of global sukuk
issuance followed by Musharaka and Mudaraba. The Saudi sukuk market is dominated
by the Istithmar. The variation in the dominance of structures is explained by the lack of
Sharia-compliance standardization. It is the responsibility of Sharia boards to determine
what structures are Sharia-compliant and given that there are no universally agreed
standards, boards across countries exercise considerable discretion in arriving at their

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opinions. Some countries adopt a conservative interpretation of Sharia, while others are
more flexible, leading to an inconsistency about what is considered Sharia complaint. For
instance, most Ijara structures that have been issued in other countries do not meet
Sharia-compliance requirements in Saudi Arabia. This lack of Sharia standardization
poses a great challenge to growth of sukuk.
MALAYSIA must look at developing other areas of Islamic finance beyond just Islamic
bonds, or sukuk, experts said.
“Malaysia has all the right ingredients to trailblaze in Islamic finance, but it must go
beyond sukuk. We need to develop other new products as well,” said Ali Abbas Zaidi,
Maybank Investment Bank’s head of Islamic markets.
Ali was a panellist in a discussion yesterday on the future of Asia’s Islamic investment
industry at the IFN Issuers and Investors forum in Kuala Lumpur.
Malaysia is an international Islamic hub and widely known for having the world’s largest
sukuk market. It also houses some 145 syariah investment funds.
Securities Commission managing director Datuk Nik Ramlah Nik Mahmood, who
chaired the session, agreed with Ali on the need for product innovation in other areas.
“From our perspective, sukuk is very important. But there’s also a whole host of petro-
market products that can be (introduced),” she said.
Ali said that new products could be developed in all areas, such as private equity,
infrastructure, liquidity, asset and project financing.
“It could underpin any type of economic activity,” he remarked.
Ali said there was much that could be learned and leveraged on from the conventional
finance industry.
What makes a difference is the way the products are used, he pointed out.
Mohamad Nedal Alchaar, secretary-general of standard setter Accounting and Auditing
Organisation for Islamic Financial Institutions, highlighted that there was no such thing
as “toxic products” in the industry, only “toxic practices”.
To a question by Nik Ramlah on whether Islamic finance should take advantage of the
recent failures in conventional finance to become more prominent, Nedal said he did not
think it was appropriate to do so.
“I recognise the opportunities that we have today after the global financial crisis, but … I
don’t think it’s appropriate for us to ride on ailing bodies.
“I think we have our own merits. Islamic finance has a lot to offer and should rise
independently from this crisis.
“We should detach ourselves from the crisis and sell what we have on ethics,
governance,” he said.
An estimated 1,200 delegates attended the three-day IFN forum, an annual event said to
be the world’s largest gathering of industry experts and practitioners.
The London-based IIBI is one of the world’s leading independent organisations dedicated
to the development and implementation of Islamic finance, achieved through education,
training, research and publications.
The SII and IIBI will share their expertise and advocate the services of each other. As
part of the deal, the IIBI will encourage its members to study for the SII’s ground-
breaking Islamic Finance Qualification (IFQ) as an entry level exam in the field. The SII
will promote the IIBI’s Diploma and post graduate Diploma in Islamic finance as
qualifications for further progression for students following achievement of the IFQ. IIBI

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and the SII may choose to also develop a long-term strategy to include market research
and demand relating to specialist Islamic Finance modules such as Sukuk (Islamic
bonds).
The SII managing director, Ruth Martin, said: “We are delighted to work with the IIBI to
promote our common goals for the development of Islamic finance skills within the UK.”
Mohammad A. Qayyum, director general, IIBI, said: “We are looking forward very much
to working closely with SII in strengthening the UK’s position as the leading centre for
Islamic finance qualifications. The agreement with SII will undoubtedly afford greater
scope of advancement of competent persons in the Islamic financial services industry.”
This week saw the meeting of the World Islamic Economic Forum (WIEF), the
equivalent of the Muslim world’s Davos, held this year in Jakarta. In attendance were
heads of states and senior government figures from across the Muslim world, including
Indonesia, Malaysia, Morocco, UAE and Qatar, with delegates from 38 countries.
The purpose of the WIEF is to increase trade and business activity among Muslim
countries and beyond. I had the privilege of chairing one of the sessions. Fazil Irwan,
director at the WIEF Foundation explained to me that WIEF’s central pillar is to develop
itself as a networking conduit between the Muslim and non-Muslim world, as they
believe business collaboration can generate greater prosperity and mutual understanding.
Established in 2004, WIEF gives particular focus on investing in women and the young;
understandable given the high levels of unemployment among these two categories in
Muslim countries.
The Muslim world’s economic performance is generally dire. Despite making up one-
fifth of the world’s population, it produces a measly 7% of its output. Much of the
discussion at the WIEF revolved around the global economic meltdown and its impact on
Muslim countries that are now facing economic contraction, job losses and greater
poverty due to the reckless model of unfettered market liberalism. With the
interconnectivity that comes with globalisation, no state is immune. The systemic failure
of the current banking model has generated much more official interest in Islamic
finance. Shariah-compliant finance is based on financing secured against underlying
tangible assets and involves risk-sharing between the parties in the pursuit of genuine
commercial activities, rather than profiteering from paper instruments whose trail often
led back to highly leveraged low-quality debt (better known now as toxic debt). There
was a widespread view among those attending (including non-Muslims) that Islamic
finance could provide one possible way out of the current malaise and become an
important foundation in a new, more stable world economic order.
One official pointed out that it is not the labeling of products as “Islamic” that is the
solution, as it is perfectly possible for a shariah-compliant bank to create sophisticated
financial products that end up mirroring the conventional system. What is needed is
ethical standards for the financial system based on transparent risk assessments and
controlled debt levels. Whether such a model of greater fairness and integrity should be
necessarily labelled with the exclusive term “Islamic” is a separate debate. Gordon
Brown yesterday, in his speech to Congress, spoke in similar terms when he said that
“markets should be free but never values-free, that the risks people take should never be
separated from the responsibilities they meet”.
The conference showed the efforts the Muslim world is making to help pull the world out
of recession. Indonesia itself is home to the world’s largest Muslim population, the third

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largest democracy and the fourth largest population, at 230 million. It is also a member of
the G20. Its stable democracy and impressive economic growth over the last decade has
marked Indonesia out as a front-line state in the west’s greater desire for a more
respectful engagement with the Muslim world after the Bush years.
Indonesia is seen as a possible template of how to deal with Muslim democracies and
markets, new and old. In her recent visit to Jakarta in February, Hillary Clinton asked
colleagues whether Indonesia held lessons for Pakistan, a state with the sixth largest
population but far less stable. Given the different role Islam plays in Pakistani and
Javanese culture and public life it is not immediately clear what those lessons might be.
Indonesia is also strategically important given its commanding presence over the narrow
Strait of Malacca, through which supertankers transport Middle Eastern oil to the Pacific
Rim. There is great excitement here that President Obama may choose Jakarta to deliver
his promised address to the Muslim world from a Muslim capital, the home of his
childhood school.
The way out of the current economic crisis will require innovative thinking and a meeting
With global finance on its knees, this summer’s business graduates face an even trickier
jobs market than most. But there is one area of banking still experiencing boom time –
Islamic finance – and universities have been quick to grasp its possibilities.
This September will see new courses and postgraduate qualifications in Islamic finance
springing up throughout the UK and elsewhere in Europe, reflecting the fact that it has
become one of the fastest-growing sectors of the global banking industry, expanding by
between 15% and 20% a year. Assets held by institutions adhering to Islamic finance
principles now amount to nearly 1 trillion dollars.
In the UK, interest in the sector also reflects the government’s commitment to promoting
Britain as an Islamic finance centre. The UK already leads Europe in the number of
Islamic finance training courses it offers, from entry to postgraduate level, and in 2006
saw the launch of the Islamic Finance Qualification, a joint initiative between a Lebanese
business school and the Securities and Investment Institute.
London gateway
Last December, the Treasury published a paper setting out the government’s aim for
London to be “Europe’s gateway to international Islamic finance”. This acknowledged
that the industry was still young and therefore not yet experiencing skills shortages, but
predicted that it soon would be. It stated: “The pool of potential applicants in the UK will
have to keep up with the rapid growth of the market.”
Universities have responded enthusiastically. Newcastle University is offering an MSc in
finance and law with Islamic finance from next academic year. Henley Business School
at the University of Reading has been offering an MSc in investment banking and Islamic
finance since last year, with students spending the second part of the year in Kuala
Lumpur. The University of Bangor in Wales has also been running its Islamic finance
MA and MSc for a year and is considering introducing a new MBA in the subject, while
the first students to take an Islamic finance option as part of an executive MBA offered in
Dubai by Cass Business School will graduate this summer. Durham, which has been
offering postgraduate research degrees in Islamic finance for some time, is now
introducing a taught MA and MSc (the MSc is more quantitative), to respond to demand.
Elsewhere in Europe, Reims Management School is offering a new specialist course in

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Islamic banking and finance for students on its masters in management programme,
taught in English.
Student demand is driving the subject as much as any urging from governments.
According to Rodney Wilson, founder and director of the Islamic finance programme at
Durham, it is coming mainly from south-east Asia, particularly Malaysia, and the Middle
East, although there is plenty of interest from the UK as well.
Joanna Gray, professor of financial regulation at Newcastle Law School, says she is keen
that their new degree course is not just seen as something for Muslims. “It’s for anyone
interested in a fast-developing industry that in the UK has been quite busy in the past few
years to accommodate forms of investment in finance that are sharia-compliant.”
Sharia principles
Islamic finance really dates from the mid-1970s, with attempts to make products
available through conventional banking, such as loans and mortgages, compatible with
sharia principles. Sharia law prohibits any transaction that involves paying interest or
investing in certain economic sectors such as gambling or pornography. It demands that
both the investor and recipient of the investment must share any risk, and transactions
have to be underpinned by tangible assets.
In the years immediately after 9/11, anything involving money and Muslims was viewed
with suspicion by many in the west because of fears about terrorism, and Islamic finance
is still taking off faster in the UK and France than in the US. But in the current global
financial climate the principles it is based on have struck a chord.
“There is an extent to which, to a westerner, Islamic finance products look very similar to
ethical finance products,” says Stefan Szymanski, professor of economics at Cass. “There
is a demand for morally upright investment vehicles, and Islamic finance is the Islamic
version of that.”
Philip Molyneux, head of the business school at Bangor, suggests that even if western
banks do not want to introduce specific Islamic finance products – and an increasing
number do – they still want to know how it is that many Islamic institutions escaped the
worst effects of the credit crunch.
He has been surprised that demand for the MA and MSc has come not just from recent
graduates and bankers wanting to improve their career prospects, but also from sharia
scholars, who play a key role in Islamic finance. Any new financial product must be
passed by them as sharia-compliant; so many financial institutions must now have
scholars standing by ready to give their verdict. These scholars often disagree, and can
even change their minds, but this offers plenty of scope for the kind of intellectual
arguments that universities relish, not to mention graduate jobs.
On the whole, most of the new Islamic finance courses steer well clear of religious issues
in favour of legal and financial questions because these are what most interest students.
Khalid El Sheik applied for Bangor’s Islamic finance MA because, having taken a first
degree in computer science in Sudan before switching to a career in marketing, he felt his
CV needed a business boost. He saw it as a chance to mark himself out from other
students and to have a headstart in an area that was likely to offer plenty of future
employment opportunities. “I had read about Islamic banking and how it was going to
increase in future, and how most of the banking sector is now looking to it,” he says. His
fellow students at the university, including one from China, had the same idea, he says.

135
Szymanski agrees that it is the idea of the moment in many universities, and while Cass is
still waiting to see how the market develops before introducing any similar courses, it is
certainly considering the possibility.
“You just have to measure how many billions of dollars Islamic finance already handles
in a year,” he says. “If that grows over the years, it will become a universal part of every
business school.”
Mumbai: “Unless there are amendments in the banking Regulation Act of India, 1949,
Islamic banking system can be introduced in India,” said Abdul Hasib, former Director,
Reserve Bank of India. The Islamic banking system will be helpful for underprivileged
and marginalized people, he said.
He was addressing a seminar on Global Financial Crisis and Islamic Economic System
organized by Jamaat-e-Islami Hind in Mumbai on Saturday. Advocating for introduction
of Islami banking in the country Abdul Hasib said: the high profile Raghuram Rajan
Committee on Financial Sector reforms in India has advocated the introduction of Islamic
banking in India. He also differentiated between Islamic financial system and interest free
banking and said that many other countries have started Interest Free banking.
While the world is facing the severest Financial Crisis in the new century there is an
exception to it. Islamic banking and financial system has largely been unaffected and
more so proved to be resilient because it’s transparent, ethical and based on sharing and
caring, observed Abdur Raqeeb, convenor, National Committee on Islamic banking.
While France, Japan, UK and other countries have opened the door for this Multi Billion
dollar business, India should not distance itself, he urged. He also shunned the
misconception that Islamic financial system is for Muslims only. He said it is for all
human beings. It makes sure that the monitory resources do not remain among few rich
but revolves in the whole society.
Interest and no transparency are the basic factor of deepening financial crisis where
billions of dollars were lost, Dr.Sharique Nisar an Economists and expert in Islamic
Banking explained. He also explained different Islamic Financial Products prevailing in
the world like, Musharakah, (Participation), Mudarabha (speculation), Qarde Hasna
( Interest Free Loan), Ijara, (Leasing). He urged, “The people must be taught about this
alternative financial system which is just and fair and a general awareness must be
created.
Maulana Riyaz Ahmed Khan, Vice President Jamaat-e-Islami, Hind, Maharshtra,
concluded: “The current financial system has resulted the accumulation of the Financial
resources into the 20 percent of the population and majority is fighting for only 20
percent of the wealth. He also added, “Islamic financial system is aimed at reversing the
scene and aimed at the welfare of the society and not of the rich.”
Dr.Rahmatullah, Economists, JF Patil, Head of Economic Department, Kolhapur
LAHORE: Islamic banks have withstood the recent turmoil in the global banking
industry triggered by the subprime mortgage crisis because their rules do not allow
dealings in products like derivatives, options or papers that caused the meltdown.
While financial institutions in the developed world lined up for huge state assistance, the
few Islamic banking institutions in these countries like the European Islamic Bank in the
United Kingdom emerged unscathed from the crisis.
“The recent financial crisis exposed the flaws in the western banking system and proved
that Islamic banks are safe which do not offer any risky product in line with the

136
injunctions of Islam,” said Al-baraka Islamic Bank Country Head Shafqat Ahmad. He
said the French president had appreciated the modes of financing offered by Islamic
banks and expressed willingness to allow the setting up of these banks in France.
Shafqat said Shariah experts ensured that Islamic banks operated strictly according to the
Islamic financial laws. “These banks do give profit to their depositors but it is based on
the true principle of profit and loss. This is the reason that profits on savings in Islamic
banks are not pre-determined.” However, “Islamic banks generally distribute more profit
to their depositors than conventional banks.”
An Islamic Shariah expert said majority of the credit provided by Islamic banks was
under the Morahaba mode (sale-purchase agreement). Explaining, he said “an Islamic
bank purchases an item, for instance cotton, on behalf of the client (in fact the client
selects the quality and quantity of cotton and the bank makes the payment) and the client
agrees to the date when the amount will be returned. The Islamic bank charges certain
profit on the purchased cotton that the client has to pay along with the principal amount.”
When reminded that conventional banks almost did the same and instead of profit they
called it mark-up, the Shariah expert said “the difference is that even if the client fails to
make payment on time the bank does not charge any additional amount while
conventional banks levy punitive interest and net payable amount increases with time.”
Shafqat said normally Islamic banks did not penalise the debtor if the payment was not
unduly delayed. However, he pointed out that in view of the prevailing culture in
Pakistan some people took undue advantage of that and deliberately delayed the payment.
He said banks were then forced to impose a penalty on unduly late payments. However,
the penalty was not added to the income of the bank and was set aside by Shariah experts
to be given as charity.
Islamic banking in Pakistan registered the most robust growth last fiscal year at a time
when the global financial crisis hit the peak. The number of Islamic bank branches
doubled during the period to 524. There are six dedicated Islamic banks in the country
while 13 conventional banks have opened Islamic banking windows which operate on the
same laws that govern dedicated Islamic banks.
The share of Islamic banking in Pakistan has increased from two per cent in 2001 to 4.9
per cent in 2009. Total deposits in Islamic banks have increased from Rs8 billion in 2001
to Rs206 billion in 2009.
LAHORE: Islamic banks have withstood the recent turmoil in the global banking
industry triggered by the subprime mortgage crisis because their rules do not allow
dealings in products like derivatives, options or papers that caused the meltdown.
While financial institutions in the developed world lined up for huge state assistance, the
few Islamic banking institutions in these countries like the European Islamic Bank in the
United Kingdom emerged unscathed from the crisis.
“The recent financial crisis exposed the flaws in the western banking system and proved
that Islamic banks are safe which do not offer any risky product in line with the
injunctions of Islam,” said Al-baraka Islamic Bank Country Head Shafqat Ahmad. He
said the French president had appreciated the modes of financing offered by Islamic
banks and expressed willingness to allow the setting up of these banks in France.
Shafqat said Shariah experts ensured that Islamic banks operated strictly according to the
Islamic financial laws. “These banks do give profit to their depositors but it is based on
the true principle of profit and loss. This is the reason that profits on savings in Islamic

137
banks are not pre-determined.” However, “Islamic banks generally distribute more profit
to their depositors than conventional banks.”
An Islamic Shariah expert said majority of the credit provided by Islamic banks was
under the Morahaba mode (sale-purchase agreement). Explaining, he said “an Islamic
bank purchases an item, for instance cotton, on behalf of the client (in fact the client
selects the quality and quantity of cotton and the bank makes the payment) and the client
agrees to the date when the amount will be returned. The Islamic bank charges certain
profit on the purchased cotton that the client has to pay along with the principal amount.”
When reminded that conventional banks almost did the same and instead of profit they
called it mark-up, the Shariah expert said “the difference is that even if the client fails to
make payment on time the bank does not charge any additional amount while
conventional banks levy punitive interest and net payable amount increases with time.”
Shafqat said normally Islamic banks did not penalise the debtor if the payment was not
unduly delayed. However, he pointed out that in view of the prevailing culture in
Pakistan some people took undue advantage of that and deliberately delayed the payment.
He said banks were then forced to impose a penalty on unduly late payments. However,
the penalty was not added to the income of the bank and was set aside by Shariah experts
to be given as charity.
Islamic banking in Pakistan registered the most robust growth last fiscal year at a time
when the global financial crisis hit the peak. The number of Islamic bank branches
doubled during the period to 524. There are six dedicated Islamic banks in the country
while 13 conventional banks have opened Islamic banking windows which operate on the
same laws that govern dedicated Islamic banks.
The share of Islamic banking in Pakistan has increased from two per cent in 2001 to 4.9
per cent in 2009. Total deposits in Islamic banks have increased from Rs8 billion in 2001
to Rs206 billion in 2009.
LAHORE: Islamic banks have withstood the recent turmoil in the global banking
industry triggered by the subprime mortgage crisis because their rules do not allow
dealings in products like derivatives, options or papers that caused the meltdown.
While financial institutions in the developed world lined up for huge state assistance, the
few Islamic banking institutions in these countries like the European Islamic Bank in the
United Kingdom emerged unscathed from the crisis.
“The recent financial crisis exposed the flaws in the western banking system and proved
that Islamic banks are safe which do not offer any risky product in line with the
injunctions of Islam,” said Al-baraka Islamic Bank Country Head Shafqat Ahmad. He
said the French president had appreciated the modes of financing offered by Islamic
banks and expressed willingness to allow the setting up of these banks in France.
Shafqat said Shariah experts ensured that Islamic banks operated strictly according to the
Islamic financial laws. “These banks do give profit to their depositors but it is based on
the true principle of profit and loss. This is the reason that profits on savings in Islamic
banks are not pre-determined.” However, “Islamic banks generally distribute more profit
to their depositors than conventional banks.”
An Islamic Shariah expert said majority of the credit provided by Islamic banks was
under the Morahaba mode (sale-purchase agreement). Explaining, he said “an Islamic
bank purchases an item, for instance cotton, on behalf of the client (in fact the client
selects the quality and quantity of cotton and the bank makes the payment) and the client

138
agrees to the date when the amount will be returned. The Islamic bank charges certain
profit on the purchased cotton that the client has to pay along with the principal amount.”
When reminded that conventional banks almost did the same and instead of profit they
called it mark-up, the Shariah expert said “the difference is that even if the client fails to
make payment on time the bank does not charge any additional amount while
conventional banks levy punitive interest and net payable amount increases with time.”
Shafqat said normally Islamic banks did not penalise the debtor if the payment was not
unduly delayed. However, he pointed out that in view of the prevailing culture in
Pakistan some people took undue advantage of that and deliberately delayed the payment.
He said banks were then forced to impose a penalty on unduly late payments. However,
the penalty was not added to the income of the bank and was set aside by Shariah experts
to be given as charity.
Islamic banking in Pakistan registered the most robust growth last fiscal year at a time
when the global financial crisis hit the peak. The number of Islamic bank branches
doubled during the period to 524. There are six dedicated Islamic banks in the country
while 13 conventional banks have opened Islamic banking windows which operate on the
same laws that govern dedicated Islamic banks.
The share of Islamic banking in Pakistan has increased from two per cent in 2001 to 4.9
per cent in 2009. Total deposits in Islamic banks have increased from Rs8 billion in 2001
to Rs206 billion in 2009.
The Institute of Bankers of Sri Lanka (IBSL) has launched the first Diploma Course in
Islamic banking with the assistance of the country’s pioneering institution in Islamic
Financial Services, Amana Investments Limited. The Amana resource pool has facilitated
the course by designing the Diploma structure, including its contents, practical
knowledge and training. The IBSL has included the Diploma in Islamic banking (DIB) as
one of its core Diplomas for the year 2009, and has selected Amana Investments as its
Strategic Partner to provide the resource personnel for this course.
The course structure is based on research conducted by M.Z.M. Sheroz, Amana’s
Training Officer, on the GAP analysis, the training need analysis and projection of core
competencies for the finance sector in 2009.
The course includes a 92 hour comprehensive study spread over 6 months, covering areas
such as origins of Islamic Finance, Sources of Sharia Law, Islamic Economic Theory and
Applied Economics, Islamic Financial Products and their respective documentation,
Principles of Sharia Accounting, Risk Management, as well as Islamic Takaful
(Insurance) and Capital Markets. The DIB programme has already begun with its first
batch of students. It has generated an overwhelming response of over 60 students,
including employees of conventional banks. The course director and lecturer for the
programme is Mr. Fairoze Burah, head of HR and Administration at Amana Investments.
He is supported by Mr. Moulavi Siraj, Sharia Supervisor at Amana and other senior
managers of the Amana Group. Other local Islamic Finance professionals are also invited
as guest lecturers during the program. Mr. Burah is a qualified HR practitioner and
training specialist, having over 20 years of experience in his field. He holds a Master of
Business Administration (MBA) degree specialising in Human Resources Management
from the Postgraduate Institute of Management, University of Sri Jayewardenepura, and
conducts regular skills development training programmes. Mr. Moulavi Siraj has a BA in
Islamic Finance from the International Peace University, Capetown, South Africa and

139
also a Diploma in Comparative Religions from the Islamic Propagation Centre
International, Durban. Mr. Siraj is proficient in all aspects of Sharia and has previous
teaching experience at the Asian Institute of Management.
Explaining why Amana joined hands with IBSL, Burah said “IBSL is one of the best
regarded institutions when it comes to banking studies, and most students find the
institute very accessible. The Diploma itself is affordably priced. We want the youth to
embrace and benefit from Islamic Finance as it has the potential of being a US$ 4 trillion
industry”. He added, “the course learning is evaluated by individual assignments, group
projects and presentations, student journals as well as periodic examinations up to the
final exam.”

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Islamic Banking
• Economic Key objective is to ensure SOCIAL JUSTICE.
• Cannot be achieved without Economic justice. justice requires a viable economic
system supported by an efficient banking system
• Interest based banking is inefficient
• Interest results in concentration of wealth.
• Islam encourages circulation of wealth and discourages its concentration in a few
hands to narrow down the distinction between rich and poor, as far as is natural
and practical.
• Circulation of wealth is as important as blood in our body: Clot of blood
paralyzes our body, whereas concentration of wealth in a few hands paralyzes
economy. Monopoly is prohibited.

Distinguishes Islamic banking from conventional banking

• All transactions are asset-based
• It is socially-responsible banking because it operates under Shariah restrictions
• Does not permit financing of prohibited goods / Industries
• It starves evil out of the society.
• Islamic banking prices goods and services which creates real wealth in the society
leading to economic well-being.
• Profit is shared with the depositor, higher the bank’s profit, higher the depositors
income.

Clearing Doubts
1) “Riba as practiced during the days of the Prophet (SAW) was only usury”.
• Islam when prohibiting something does not only prohibit the prevalent form,
but all forms that might erupt in future. The changed state does not change
the ruling.

141
 • E.g. Liquor, Pork, Corruption/Immorality: Today’s modern and sophisticated
form does not change their rulings.
• The same applies to interest.
2) “Commercial interest did not exist in the days of Prophet (is incorrect as both
forms of interest existed in Islamic SAW).”
• This claim and pre Islamic history. Some examples:
• The tribe of Thaqeef advanced cash as well as commodities on interest to the
natives of Taif, the tribe of Mughairah and the business community of
Makkah.
• H.Abbas and H. Khalid bin Waleed (RA) formed a company with joint capital
whose prime business was cash advancement on interest.
3) There is a Qura’nic verse “O believers do not devour one another’s possession
wrongfully; rather than that, let there be trading by mutual consent” (Al Nisa verse
29). “Wrongful devouring” only arise if the consent of one of the parties is absent but
in commercial interest the mutual consent is present of both parties, so its not Riba.
• Mutual consent is not the criteria to render anything halal which is haram.

Qura’nic verses

“Those who devour Riba shall rise up before Allah like men whom Shaitan has demented
by his touch; for they claim that trading is like usury. But Allah has permitted trading and
forbidden “Those who devour Riba shall rise up before Allah like men whom Shaitan has
demented by his touch; for they claim that trading is like usury. usury. He that receives an
admonition from his Rabb and mends no heed shall be among the people of fire and
shall remain in it forever his ways may keep what he has already earned; his faith is in
the hand of Allah. But he that pays no heed shall be among the people of fire and
shall remain in it forever.”

“O you who believe, Fear Allah and give up what remains of your demand for Interest, if
you are indeed a believer. If you do not, then you are warned of the declaration of war

142
from Allah and His Messenger; But if you turn back you shall have your principal: Deal
not unjustly and you shall not be dealt with unjustly.”

Selected Ahadith
From Hazrat Jabir Ibn-e-Abdullah (RA):
The Prophet, peace be on him, cursed:
• The receiver and the payer of interest,
• The one who records it and
• The witnesses to the transaction
And said: "They are all alike [in guilt]."
(Muslim, Tirmidhi and Musnad Ahmad)

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Conventional banking
Conventional banking is also called commercial banking and is based on a pure financial
intermediation model, whereby banks mainly borrow from savers and then lend to
enterprises or individuals. They make their profit from the margin between the borrowing
and lending rates of interest. They also provide banking services, like letters of credit and
guarantees. A proportion of their profit comes from the low-cost funds that they obtain
through demand deposits. Commercial banks are prohibited from trading and their
shareholding is severely restricted to a small proportion of their net worth, Or simply we
can say conventional banking is engaging in the business of keeping money for savings
and checking accounts or for exchange or for issuing loans and credit etc.

• The functions and operating modes of conventional banks are based on fully
man made principles.
• The investor is assured of a predetermined rate of interest.
• Conventional system aims at maximizing profit without any restriction.
• Conventional banking does not deal with Zakat.
• Lending money and getting it back with compounding interest is the
fundamental function of the conventional banks.
• Conventional system can charge additional money (penalty and compounded
interest) in case of defaulters.
• In conventional very often it results in the bank's own interest becoming
prominent.
• Since income from the advances is fixed in conventional, it gives little
importance to developing expertise in project appraisal and evaluations.
• The conventional banks give greater emphasis on credit-worthiness of the
client.
• The status of a conventional bank, in relation to its clients, is that of creditor
and debtors.
• Conventional banking prices money.
• Depositors get a fixed rate regardless of the bank’s profitability, thus
insulating them from the bank’s true performance.

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 Auto financing

Conventional banks use two types of Auto financing which are as follows:-

1) Leasing
Leasing has two types given as follows:-
Operational Leasing
In operational leasing customer gets assets only for purpose of use and pays the
rent for the time period asset is leased. In this after usage of asset for specific time
period the asset is taken back by the asset holder or the leasing bank.
• In first case customer can directly have a asset from bank and pays rent for
the time period asset is leased and returned back when the time period is
finished.
• In second case bank gives the authority to customer that he can choose the
asset form the registered outlets or showrooms. And bank buy asset from
their and leased to the customer for use of specific time period and charges
the rent and takes the asset after that specific time period.
• In third case bank make the customer as his agent that he can choose the
asset of his choice and on the behalf of bank can pick the asset from their
directly and bank will pay the finance. But asset is on the name of bank
and titled on the name of bank mean its property of bank which is leased
to that customer for only use for specific time period on rental basis.

Financial Leasing
In financial leasing the auto is leased on rental bases to the customer and owned
by bank and after completion of rents and all dues the asset is transferred to the
customer.
• In leasing down payment with insurance and registration charges are
charged at the time of booking of Auto.
• Rent starts from the day of booking of asset even if customer gets the
possession of the asset after 3 months.
• The rental is charged on fixed ratio.
• In case of late payment of rent, late payment charges have been paid by
the customer and these charges are the part of bank’s income.
• If customer wants to close his account or want to return the asset or wants
to dissolve the agreement the term banks used for this is “Early pay off”
so in case of early pay off customer has to pay the remaining amount with
additional ratio of penalty and after this the case is closed.

145
 • In case of theft or loss of asset insurance company have to pay but if
insurance company pay less than outstanding amount of bank the customer
has to pay the loss and gets his down payment back.

2) Auto Finance
In Auto Finance the loan is given to the customer for the auto purpose and there
is a agreement between customer and bank known as “High purchase
agreement” (HPA) in this agreement the asset is named on both parties customer
as well as bank actually it is the sharing of asset. Customer pays all the dues in
installments. Customer is not able to sale the asset till covering all the liabilities.
After paying all dues the asset is fully transferred to the customer.
• In Auto Finance down payment with insurance and registration charges
are charged at the time of booking of Auto.
• Installments start from the day of booking of asset even if customer gets
the possession of the asset after 3 months.
• The installments are charged on fixed Markup rate for one year and after
one year the charges are revised. (12Mths Kibor+5% - Annually revised).
• In case of late payment of Installments, late payment charges have been
paid by the customer and these charges are the part of bank’s income.
• If customer wants to close his account or want to return the asset or wants
to dissolve the agreement the term banks used for this is “Early pay off” so
in case of early pay off customer has to pay the remaining amount with
additional ratio of penalty and after this the case is closed.
• In case of theft or loss of asset insurance company have to pay but if
insurance company pay less than outstanding amount of bank the customer
has to pay the loss and gets his down payment back.

Islamic Banks uses Ijarah and Musharakah as the modes of Islamic principles for auto
financing.
1) Ijarah
In Ijarah the auto is leased on rental bases to the customer and owned by bank
and after completion of rents and all dues the asset is transferred to the customer.
• In Ijarah security (down payment) are charged at the time of booking of
Auto.
• Insurance and registration charges are charged in rents.
• Rents starts after one month of possession of asset to the customer.
• The rental is charged on fixed profit rate.
• In case of late payment of rent, late payment charges have been paid by
the customer and these charges are treated as “Charity Fund” which later
on given to different welfare institutes. This fund is not the part of banks
income. These charges are to bound customer to pay their charges on time.
• If customer wants to close his account or want to return the asset or wants
to dissolve the agreement the term banks used for this is “Early pay off” so
in case of early pay off customer has to pay the remaining amount with
additional ratio of penalty and after this the case is closed.

146
 • In case of theft or loss of asset insurance company have to pay but if
insurance company pay less than outstanding amount of bank, the bank
deduct loss amount from customer’s security and remaining will be
returned.
2) Musharakah
Musharakah is agreement between two parties which declares debt to equity ratio
(percentage). If the customer wants to buy a house of 10 million and he
approaches the bank for finance there he show willingness for 4 million of finance
from their side and want 6 million from bank. Then bank has agreement of
Musharakah and the asset is transferred on the name of bank and then bank leased
that house to the same customer on rental bases so he can clear all his debt and all
liabilities after clearing all liabilities the asset is transferred to the customer as his
property.
• In case of lose, the lose is shared as the percentage of debt to equity ratio
(percentage).
• In case of profit, the profit is shared same as the percentage of debt to
equity ratio (percentage).

147
Bank Alfalah

Years Financing (sales units) Ijarah (sales units)

2006 390 146
2007 216 133
2008 700 207

Financing Ijarah

800 250
600 200
150

sales
sales

400
100
200 50
0 0
2005 2006 2007 2008 2009 2005 2006 2007 2008 2009
years years

Askari bank

Years Leasing (sales units) Ijarah (sales units)

2006 627 34
2007 670 90
2008 199 79

Leasing Ijarah

800 100
600 80
sales

Sales

400 60
40
200
20
0 0
2005 2006 2007 2008 2009 2005 2006 2007 2008 2009
years Years

148
Standard Chartered

Years Financing (sales units) Ijarah (sales units)

2006 890 NIL
2007 630 NIL
2008 229 NIL

Financing

1000
800
600
sales

400
200
0
2005 2006 2007 2008 2009
years

Muslim Commercial Bank

Years Financing (sales units) Ijarah (sales units)

2007 1815 28
2008 1772 20

Ijarah Financing

30 1820
sales

sales

20 1800
10 1780
0 1760
2006 2007 2008 2009 2006 2007 2008 2009
years years

149
References:-
• Bank Alfalah (auto financing) Sadar Rawalpindi
• Bank Alfalah (Ijarah) Mall road Rawalpindi
• Askari Bank (Leasing) Sadar Rawalpindi
• Askari Bank (Ijarah) Jinnah Avenue, Blue Area, Islamabad
• Standard Chartered Bank Jinnah Avenue, Blue Area, Islamabad
MCB Bank Jinnah Avenue, Blue Area, Islamabad

150