General Framework for Discussion of Islamic Finance | Part 2

By Dr Shaykh al Muhaddith Mohammad Akram Nadwi, Oxford

Part 1  |  Part 2  |  Part 3

Because our subject today is Islamic finance, I will try to illustrate the difference between guidance and doctrine using examples connected to economic behavior. The guidance, as presented in and constituted by the Qur’an and Sunnah, contains two kinds. One kind is quite specific, explicit, concrete instructions to do this and not that; the other kind is commands or strong encouragements to seek certain outcomes or goods. Mostly these goods are the virtues (being honest, kindly, fair, just, decent, etc.) that are connected to those concrete instructions, directly or indirectly. The sum of these good outcomes, or the supreme good, is ‘ibadah (worship) because that is what human beings were created for; worshipping their Creator is their proper function; doing so well, with ihsan, is what most honors and dignifies human life.

Now, consider a poor man who happens to have two bicycles. One he uses every day; the other is idle. He decides to rent out the second bicycle for a period of six months, and this becomes a source of income for him. He takes the risk that the bicycle will suffer wear and tear over the rental period, perhaps may never be returned, and so on. The rental income he gets in this way is lawful. Now consider a rich man who has two lots of money; one lot he needs for his everyday uses; the other lot is surplus. He decides to rent out the latter for a period of six months. Money does not suffer much wear and tear, but how much the same money can buy varies over time; also, there is the risk that the money may never be returned, or the return of it delayed, and so on. Yet, despite these risks attached to renting out money, doing so, and the income from doing so, is forbidden by God and by His Messenger. The language used in the Qur’an to condemn the practice is exceptionally fierce: those who indulge in riba are threatened with war from God and His Messenger, that is to say, the sanction against the practice is not just reserved to the hereafter.

In the example just given, the forbidden act is renting out money, i.e. lending it on interest. That is a simple matter to understand. It is not at all what modern banks do. They do not merely lend on interest the money that they possess directly or which they control as agents on behalf of their depositors. The banks also, as the expression goes, “create money” by lending on interest money that is not in their possession or control. Every debt owed to a bank, and the interest on it, even before it is repaid, is accounted on its books as an asset of the bank, as part of the disposable reserve of money it can lend out – which it does, again and again. All the levers of state power are called on to underwrite the authority of banks to, in this way, lend what they do not have and to charge rent for doing so. This is especially true when there is a perception that the debts owed to banks may not be repaid, which carries the threat that those who have deposited their money in the banks will not get it back. Typically, in such circumstances, the state protects the interests of the banks, not the depositors. When governments claim that they have guaranteed deposits, what they have done in fact is to protect the banks from the effects of a panic among depositors which would lead them to demand their money back from the banks – in practice the banks never hold enough money to be able to repay all at once the money they are supposed to be keeping safe. And where on earth would the government get the money from to repay all the deposits it claims to guarantee on behalf of the banks?

The prohibition of riba is an instance of a specific, explicit, concrete instruction in the Book and Sunnah. It is directly connected to an assemblage of commands and strong encouragements: to trust that God does provide for the sustenance of His creatures (the opposite of the assumption of scarcity of resources); to purify earnings through the obligatory payment of zakah, and the voluntary payment of sadaqah; to understand that the poor and needy have a right on the property of those who enjoy a surplus. It is connected to the general encouragements to deal equitably and fairly, to avoid fraud and deception, etc., to be benevolent. Economic behavior is in no way or degree exempt from the ethical norms that apply to human relationships generally. The prohibition of riba has also been linked to the prohibition of gambling or speculation and could be linked to the prohibition of exploiting the weak-minded or minors who are unable to understand or manage their own affairs. Taken together, these topics make up the guidance of Qur’an and Sunnah on the direction and management of economic power and economic relationships. Of particular importance for our subject is the Qur’an’s strong and clear instruction not to permit wealth to circulate only among a few; the flow of wealth must not be impeded by hoarding or monopolizing essential commodities or blocking routes of transit of goods and information, or by any other means that lead to excessive concentrations of wealth in few hands. An example of a pernicious monopoly that is pervasive in modern societies is the one I just described, the power given to banks to “create money” out of the thin air of arithmetic, and then charge rent for lending it.

The doctrines that Muslim scholars developed from and around this guidance were intended to serve that guidance, to make it easier to understand and implement in the ever-variable circumstances of real-life situations in different regions with different local customs of trade and commerce. The doctrines were not developed to serve an economic or political or legal philosophy with a rationale distinct from and independent of the guidance.

But why was it necessary to do this at all?

If we ask and answer this question properly we will get a very useful insight into the nature of the doctrines.

Ordinary human experience tells us that to apply any rule fairly you have to do both of two things: you have to apply the rule consistently in different situations, and yet you have to apply the rule flexibly enough to take account of the particular circumstances to which you are applying it. If you apply the rule while ignoring the circumstances of the particular case, you risk committing an injustice of some degree. On the other hand, if you do not apply the same rule in the same way to different cases, you risk the charge of arbitrariness and favoritism. The hardship of finding the balance between these two needs is what qualifies human judges for recompense hereafter just for trying, and a double recompense if they happen to find the right balance.