ISLAMIC BANKING
Series on Islamic Banking By Abdullatif Essajee, a lecturer at University of Nairobi and a member of the Jamia Mosque Commitee-Nairobi

Perspectives
The importance of banking institutions in any economy cannot be over emphasized. Banks, both directly and indirectly, play a role in the distribution of resources that can be devoted to adding to the real capital of a nation. Banks, among other financial institutions, “play an important role in mobilizing savings and investing them in specific processes of capital formulation.” (Siddiqqi,1997 p.12). Their being Part of the financial systems, makes them central to a significant amount of financial transactions.

In Kenya, towards the end of the year 2000, these institutions came under attack for being interested in short-term goals and not long-term goals. They were accused of retarding economic growth through high interest rates and restrictive lending and were blamed for the suffering that they have caused Kenyans. The Daily Nation of 27-11-2000 reported “Attorney General, Amos Wako, joined the chorus condemnation against rates charged by the banks. The high interest rates have retarded economic growth through restrictive lending Mr. Wako said…… But he added, other means to deal with the problem should be found instead of introducing interest rate controls.” This was a response to the “Donde Bill” which sought to “peg interest rates to the Treasury Bill, meaning the cost of borrowing is likely to halve from around 30 per cent to 15 per cent…” (DN 24-11-2000 p2)

Kabete MP, Mr. Paul Muite, in his contribution to the debate on regulating the interest rates charged by banks is quoted as saying, “Kenyans have suffered enough in the hands of the major banks. The financial institutions are only interested in short-term profits and not long-term goals.”(DN 29-11-2000 )

In all the discussions on the Donde Bill, no proposal was made towards abolition of the interest-based system nor was an alternative to the system offered. This is so, because the world economic activities are resting on a concept taken for granted that interest is inevitably thebasis for the movement of capital. Interest for many in the world today has occupied a central role in their economic well being. This assumption has been central to the workings of interest based financial institutions acting as financial intermediaries.

The struggle for the establishment of interest-free banks in Kenya has taken more than fifteen years. On 15th June 2006, the Minister of Finance, Hon. Amos Kimunya in his budget speech proposed to amend the Banking Act to allow Islamic Banking.

The dealing in interest has been banned and prohibited by Islam in the strongest and harshest words possible. Indeed not only Islam but even Christianity and Judaism have prohibited the dealing in interest.

Nadhif Jama in his write-up on “The Rise and Rise of Islamic Banking” quotes Hanson D.G, in explaining that the dealing of interest was considered unchristian. “Throughout the middle ages in this country (Britain), the lending of money at interest was considered unchristian and was forbidden to the Englishmen, some of whom were hanged for the offence. The taking of interest was stigmatized with the name usury…” Nadhif further explains that Hanson confirms that the taking of interest on loan was made legal in the U.K. by King Henry VIII in the year 1545.

It was and is still assumed in certain quarters that the prohibition in dealing in interest is no longer viable and that the establishment of interest free banking systems is impracticable and unworkable.

To the contrary, to date, there are fully fledged banks in the world operating on interest free basis and can be found on all continents with London, Copenhagen, Bahrain, Kuala Lumpur, Istanbul and Geneva being the leading countries for structured interest free based banking transactions. Three countries, Pakistan, Iran and Sudan, have gone far with programmes of eliminating in total interest from their financial systems. Malaysia in March 1993 launched her interest free banking scheme which is running parallel to the interest based banking scheme.

This exposition highlights the general working of interest free banks as an alternative to conventional banking, which is interest based. The discussion opens with a delineation of the substance of banking institutions, interest free banking, interest and profit. This delineation is followed by a discussion on the prohibition of dealing in interest by the Qur,an, the Sunnah of the Prophet Muhammad (PBUH) and the Bible.

With that as the background, the discussion moves on to the “state of play”, reflected through the operations of interest free banks, a brief discussion of profit as an equitable alternative to interest, and the legal structures of Kenya, specifically the Banking Act and the Central Banking Act.

This paper does not in any way make a claim of discussing all aspects of interest-free banking. Emphasis is laid on those aspects of Interest free Banks’ operations that offer an alternative to interest based operations of conventional banks.

Prohibition of dealing in Riba (Interest)
Riba as explained earlier is an Arabic word which literally means increase, addition, excess, rise, expansion or growth. In the Shariah, Riba technically refers to the ‘premium’ that must be paid by the borrower to the lender along with the principal amount as a condition for the loan or for an extension of its maturity. In this sense, Riba has the same meaning and import as interest in accordance with the consensus of all the fuqaha (jurists) without any exception.

It may be observed that the words ‘Usury’ and ‘Interest” have been adopted in some english translation of the Qur ‘an, in translating the Arabic word ‘Riba’. Some of the translators who adopted the word ‘Usury’ in translating the word ‘Riba ’ eventually to clarify in their commentary that Riba literally is usury and interest. Of late the word Riba is maintained in the English translation of the Holy Qur ‘an due to the inability of the english words ‘usury’ and ‘interest’ to capture the full meaning of the word Riba as used in the Shariah.

Types of Riba (Interests)
The term Riba (interest) is, however, used in the Shariah in two senses. The first is Riba al-nasi’ah and the second is Riba al-fadl.

i.) Riba al nasi’ah
The term nas’iah comes from the root word nasa’a which means to defer, postpone or wait and refers to the time that is allowed for the borrower to repay the loan in return for the ‘addition’ or the premium. Hence Riba al nasi’ah refers to the interest on loans. It is in this sense that the term Riba has been used in the Qur’an in The verse Al Baqarah: 275.(Chapra, p56 & 57) “While Allah has permitted trade and forbidden interest” (Al Qur’an 2:275)

This is also the Riba that the Prophet Muhammad (PBUH) referred to when he said, “There is no Riba except in nasi’ah (waiting)” Narrated by Usamah ibn Zayd and reported by Bukhari, Muslim and Ahmad The prohibition of Riba al-nasi’ah essentially implies that fixing in advance of a positive return on a loan as a reward for waiting is not permitted by the Shariah . There is no difference of opinion among the scholars of Islam on the prohibition of Riba al nasi’ah .

All eminent Muslim Scholars and jurists through out history have never differed on the fact that bank interest is a form of Riba which Islam has banned. Efforts of some Pseudo- Jurists to distinguish between Riba and bank interest and to legitimize the latter, claiming that it is usury that has been prohibited, met with almost universal rejection and contempt.

ii.) Riba al-fadl
Riba al-fadl is encountered in hand- to hand purchase and sale of commodities. It covers all spot transactions involving cash payment on the one hand and immediate delivery of the commodity on the other. Islam wishes to eliminate not merely the exploitation that is intrinsic in the institution of interest, but also that which is inherent in all forms of dishonest and unjust exchange in business transactions.

Riba al- fadl has arisen from the ahadith requiring that if gold, silver, wheat, barley, dates and salt are exchanged against themselves they should be exchanged spot and be equal and alike.

From Abu Sa ‘id al-Khudhri: The Prophet, peace be upon him, said: “Do not sell gold for gold except when it is like for like, and do not increase one over the other: do not sell silver for silver except when it is like for like, and do not increase one over the other: and do not sell what is away (from among these) for what is ready.” (Bukhari, Muslim, Tirmidhi, Nasai and Musnad Ahmad)

From Ubada ibn al-Swamit: The Prophet, peace be upon him, said: Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt –like for like, equal for equal, and hand to hand: if the commodities differ, then you may sell as you wish, provided that the exchange is hand to hand. (Muslim and also in Tirmidhi) From Abu Sa ‘id al-Khudhri: The Prophet, peace be upon him, said: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt –like for like, and hand to hand. Whoever pays more or takes more has indulged in riba. The taker and the giver are alike (in guilt)” (Muslim and Musnad Ahmad)

There are two questions that arise from these ahadith. The first is why have only six commodities been specified? , and the second is why the insistence on like for like?

Of the six commodities specified in the ahadith, two unmistakably represent commodity money whereas the other four represent staple foods. Fuqaha have over the centuries debated the question of whether Riba al-fadl is confined only to these six items or it can be generalized to include other commodities; and if so what should be the basis (illat) used for this purpose.

The Fuqaha (jurists) are in agreement that whatever commodity is used as a medium of exchange (money) enter the sweep of Riba al fadl. Their conclusion is based on the characteristics of gold and silver as commodity money.

There is difference of opinion among the fuqaha on the other four items. One opinion argues that since all four commodities are sold by weight or measure therefore all items which are saleable would be subject to Riba al fadl. A second opinion is that since all four items are edible, Riba al fadl would be involved in all commodities which have the characteristic of edibility. A third opinion is that since these items are necessary for subsistence and are storeable (without being spoilt) therefore all items that sustain life and are storeable are subject to Riba al fadl. A fourth opinion is that all the six commodities were used as money in and around Madinah, particularly among the Bedouins and therefore Riba al fadl would be involved in exchange of any goods which is used as money.

The real significance of the prohibition of Riba al fadl maybe understood only by answering the second question of why the insistence like for like and equal to equal? Islam insists on justice and fair play in all aspects of human life. In transactions, the price and the counter value should be just in all transactions. Justice can be rendered only if the scales of balance carry the same value. To ensure justice the Prophet Muhammad (PBUH) even discouraged barter transactions and asked that a commodity for sale be exchanged for cash proceeds and the cash proceeds be used to buy the needed commodity.

From Abu Said: Bilal brought to the Prophet (PBUH), some barni [good quality] dates whereupon the Prophet asked him where these were from. Bilal replied, “I had some inferior dates which I exchanged for these – two sa’s for a sa.” The Prophet said, ‘Oh no, this is exactly riba . Do not do so, but when you wish to buy, sell the inferior dates against something [cash] and then buy the better dates with the price you receive.’ (Muslim and Musnad Ahmad)

This is because it is not possible in a barter transaction, except for an expert, to visualize the fair equivalent of one commodity in terms of all other goods. The prohibition of Riba al fadl is thus intended to ensure justice and remove all forms of exploitation through ‘unfair’ exchanges and to close all back-doors to Riba because in the Shariah, anything that serves as a means to the unlawful is itself unlawful.

It is about this second type of Riba that Sayyidna Umar is quoted as having said. “Three issues are such where I wished the Prophet (PBUH) had explained them to us in further detail. Two of these issues relate to matters of inheritance and the third one relates to certain kinds of riba.”

Some corrupted minds have taken these words of Sayyidna Umar and used them as arguments that the whole issue of Riba is clouded. The wish of Sayyidna Umar is limited to Riba al fadl only an issue Fuqaha have had differences in opinion not Riba al-nasiah.

Sayyidna Umar advises on the same, “ …so give up not only riba but also ribah (whatever raises doubt about its rightfulness)”

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