The Fiqh of Islamic Financing

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The Fiqh of Islamic Financing

• Presented by
• Imam Faisal Ahmad,
• with thanks to the Islamic American University

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Riba

• The only sin in the Quran in which Allah (SWT)
  declares war against those who commit it.
• (?? ???? ????? ????? ????? ???? ????? ?? ??? ??
  ????? ?? ???? ?????????? ?? ?????? ?????? ?????
  ?? ???? ?????????? ???? ???? ???? ??????? ??
  ?????? ??? ???????)

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Riba is Haram

• Allah (SWT) and His Prophet (PBUH) curse those
  who are involved in usurious transaction.
• (??? ???? ??? ????? ?????? ?????? ???????)
• (??? ???? ???? ??? ???? ???? ???? ??? ?????
  ?????? ?????? ?????????????? ????)
• Taking Riba and giving it to others are the same
  !even witnesses and the one who documents the
  usury are cursed too !

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Paying or Receiving Riba

• Dealing with Riba is one of the seven major sins,
  where the Prophet (PBUH) was warning His nation
  from committing them
• ??????????? ????????? ????????????? ??????? ???
  ??????? ??????? ????? ????? ???? ?????????
  ????????? ??????????? ???????? ????????? ???????
  ??????? ??????? ???? ?????????? ???????? ????????
  ???????? ????? ?????????? ????????????? ??????
  ????????? ???????? ?????????????? ??????????????
  ???????????

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Avoiding Riba

• American's economy is a Capitalist economic
  system in which Riba is a built-in pillar in
  this system, and structured in a way that it is
  hard to be avoided.
• Difficulty of having balance between living in
  America, conducting business, transacting from
  one side , and avoiding Riba from the other side.

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Living in the West is not an Excuse to pay Riba

• However, living in a non-Muslim country does not
  allow Muslims to be involved in any usurious
  transactions.
• The difficulty of avoiding Riba can NOT be taken
  as a justification to permit it, because it could
  be avoided.
• Transacting with Muslims or with non-Muslims in
  usurious transactions are the same, both are
  prohibited.

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Transactions at a glance

• 1-Bank Loans
• 2-Late Fees or Charges
• 3-Credit Cards
• 4-Debit Card
• 5-Saving Account

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• 6-Checking Account
• 7-Financing
• 8-lease to purchase option.
• 9-Investing In (401)K Plan

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• 10-Buying a house via conventional
  mortgage and according to
  Shariah
• 11-University Late registration fees
• 12-Status of money from loans after repentance.

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• 13-Monetary Gifts (Cashback)
• 14-Non-Monetary Gifts (Rewards, Prizes)
• 15-Working in a company that has some Riba
  transactions for non-Muslims .
• 16-Student loans.

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1- Meaning of Usury (Riba)

• Usury (Riba) in Arabic lexicography
• Excess,addetion, increase ,to add.
• Example from the Quran ????? ???????
• In Islamic jurisprudence increase or delay when
  exchanging specific commodities in specific
  transactions.
• ??????? ?? ??????? ?? ?????? ??????? ?? ????????
  ???????

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2- The two kinds of usury

• A - Riba of increase ??? ?????
• When the amount paid back exceeds the original
  debt or, gaining any benefit out of the debt
• B - Riba of delay ??? ??????
• When the payment is delayed or deferred after its
  due date.

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3- Usurious Transactions

• ?? ??? ???? ?????? ??? ??? ???? ???? ??? ????
  ???? ????
• ????? ?????? ??? ???? ?? ??? ????? ????? ???
  ???? ?? ??? ?????? ?????? ??? ???? ?? ??? ??????
  ?????? ??? ???? ?? ??? ??????? ??????? ??? ????
  ?? ??? ?????? ?????? ??? ???? ?? ??? ??? ???
  ??????? ??? ???? ????? ??????? ????

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4- How Does Usury Occur in Loan Contracts ?

• A-Riba of increase
• If the lender stipulates extra money by
  the borrower-either when he pays on time or when
  he delays his payment--this is riba of increase
  ??? ????? . This includes even the stipulation
  of providing help, service, a gift, food or
  anything because of the loan
• - A well known rule any loan that derives
  stipulated benefit is usury.
• ?? ??? ?? ???? ??? ???

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• B- Riba of delay
• If the borrower delayed his payment
  after receiving a loan, this is riba of delay.
• But since the purpose of a loan contract is
  to help others, and its among non-profit
  contracts (???? ????????) where profit is not
  intended, as in charity, lending, will
  contracts this kind of riba is exempted and
  absolutely lawful. Rather the lender is
  anticipated to be rewarded because lending to
  others is an obedience and a good deed.

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5- How Does Usury Occur in Sale Contracts?

• Usurious sale is limited to the categories
  mentioned by the Prophet money (gold and silver)
  and food stuffs.
• To avoid interest, the following conditions must
  be satisfied
• A- Trading in the same category and the same
  item, like rice for rice, wheat for wheat,
  American dollars for American dollars and
  Jordanian dinars for Jordanian dinars. There are
  three conditions

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• Equality ??????? It should be the same amount,
  to avoid Riba of increase.
• Mutual Submission ??????? It should be exchanged
  at the same time, to avoid Riba of delay.
• Finalization ?????? The completion of the
  transaction without deferring to the future (in
  other words, it has to be effective immediately).

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• B- Trading in the same category but with
  different items like rice for sugar, American
  dollars for Jordanian dinars, etc.
• This has to satisfy two conditions
• Mutual submission ???????
• Finalization ??????
• Equality is not required .

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• C- Trading in the two different categories
  (money and food)
• Like American dollars for rice, Jordanian dinars
  for sugar, etc.
• Only one condition must be satisfied
• At least one of the two items must be submitted
  during the contracting.
• ??? ???? ???? ??? ???? ???? ? ??? ?? ??? ??????
  ???????

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• D- Trading in a non-usurious assets
• In this case, there is no harm in trading uneven
  quantities.
• For example, trading two old cars for one new
  car. This is not Riba.

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• If any of the aforementioned conditions are
  not completely fulfilled, then the transaction
  is an interest-bearing contract, and its
  definitely prohibited.

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6-Reasons for prohibition

• Ibn al-Qayyim Everything in Shariah has a
  reason and benefit for society.
• In Islam, lending is supposed to be a charitable
  act, not for profit and exploitation.
• Riba leads to hatred and envy between the rich
  and the poor
• Riba causes money to stagnate

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7-More reason for Prohibition

• Riba exploits the poor, and makes them poorer if
  they cannot pay. They even have to pay Riba on
  the Riba that they owe.
• Riba is profit on wealth, with no actual
  investment in real assets.
• In Islam, the exchanged commodities must be
  equal, and hand in hand (??? ) Riba leaves the
  door open to the unknown (gharar).
• Usury and injustice are synonyms !!

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Practical Examples

• 1- Bank Loans
• Borrowing with a predetermined lump sum
  or percentage to be paid by the borrower is an
  interest-bearing loan.
• The prohibition of this kind is declared in the
  Quran and the Sunna
• ?? ???? ????? ????? ????? ???? ? ???? ?? ??? ??
  ????? ?? ???? ??????
• ??? ???? ???? ??? ???? ???? ???? ??? ??????
  ?????? ? ???????????????????
• ?? ????
• Borrowing to invest or to purchase does not
  change the rule.

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• 2- Late Fees or Charges
• Any late fees paid out of the loan, utility bill,
  deferred payment sale, payment plan (paid on
  monthly basis) is riba.
• A Muslim must make sure to pay on time to avoid
  involving himself in any interest-bearing
  activity.

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• 3- Credit Cards
• a- Definition A credit card is a contract
  between a credit company and a client that allows
  the client to borrow money either by withdrawing
  cash, or using the card to pay bills as well as
  make purchases.

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• b- The contract-some times- indicates the
  obligation of paying extra money by the client
  in case of
• Delayed payment
• Cash advance (when withdrawing from the ATM
  machine of the credit company).

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• Payment plan (on a monthly basis).
• c- The above conditions are usurious. Agreeing to
  this is prohibited.

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• d- Scholars differentiate between two
  kinds of prohibited matters
• ???? ????? prohibited by itself, like paying riba
  for others, taking it from others, adultery,
  drinking alcohol, etc.
• ???? ????? prohibited because of its
  consequences, like agreeing to pay late fees
  (without paying it yet).

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• e- The reason behind this classification is
  that
• Whatever is prohibited by itself would be
  permitted in case of necessity, while whats
  prohibited because of its consequences becomes
  permissible in case of true and public need.

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• f- In our example, a credit card
  is a true and public need in general.
• Credit cards are essential to facilitate daily
  transactions in the U.S.

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• g- Based on the above conclusion, having a credit
  card is permissible under the following
  conditions
• Reaching a stage of a real need
• Abstaining from withdrawing cash from the credit
  company if it is a chargeable service
• Paying bills in full before the due date
• Refraining from using it when not needed.

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• h- When it comes to annual fees, then these fees
  are considered as a service charge, because it is
  not affiliated with using the credit card. So it
  is allowed to pay it.

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• J-Paying service fees for (cash withdrawal)
  from any ATM machine does not belong to the same
  bank of the client is permissible, because the
  new company is not the lender of the client (the
  borrower in this case), rather they save his time
  by withdrawing the money on his behalf from his
  original company , and charging him because of
  this service . (??? ?????)

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• L- Credit transfer
• Transferring debt from one credit company to
  another is a chargeable service .
• The new company would charge the client (0 APR)
  for the debt, but there is a transfer fee .
• This fee is Riba because the new company is the
  lender, and the paid-back money should not exceed
  the original debt.

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• 5- Debit Card
• a- It is an easy way to withdraw from the
  clients checking account.
• b-Annual fees are allowed.
• c- Service fees for withdrawing cash are allowed
  too.

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• d- Using it is allowed as long as the depositor
  has sufficient funds.
• e - Withdrawing via debit card without having
  sufficient fund would result in an overdraft
  charge, where the bank would pay the money on
  behalf of its client ,and then charge him the
  original amount plus the (over draft charge),
  which is riba.

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• 6- Savings Account
• a- A pre-determined percentage of interest is
  given to the client when opening such an account.
• b- This percentage is Riba, and its unlawful.
• c- Spending this extra money for Muslim public
  benefits does not change the rule because of the
  absolute prohibition of such a contract,
  regardless of the pre-intention of getting rid of
  this prohibited extra money.

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• 7- Checking Account
• a- A public need to secure money and facilitate
  daily transactions.
• b- Usually, banks use a percentage of the
  deposited money to lend to other clients with
  interest and without taking the permission of the
  account holder.

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• c- Indirectly, all account holders help banks to
  conduct interest-bearing activities. But because
  of the need and lack of a viable Islamic
  substitute, having a checking account is
  permissible.
• d- A Muslim client should make sure to have
  interest-free checking account, since some banks
  offer interest even on the checking account.

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• d- In case there are Islamic banks available, a
  Muslim is prohibited from having a checking
  account in any conventional bank,
• ??? ???? ????? ? ???? ? ??? ?? ??? ?????
• meaning, Whoever participates in conducting
  bad deeds ,will share in the punishment.

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• 8- Financing
• a- Offering two different prices for the same
  commodity based on the duration of the payments
  is permissible, as long as the two parties come
  up with an agreement on one of the two prices,
  according to the four madhahab. Some scholars
  said it was Riba, but this is not correct.
• b- This permissibility is stipulated with three
  conditions
• The two parties have to agree upon only one of
  the two options.
• No third party is allowed to finance.
• No late fees are allowed.

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• c- Purchasing through a third party in the U.S
  means that the third partyi.e. bank, credit
  company, etc. would pay the amount on behalf of
  the buyer and eventually charge the original
  amount plus a percentage. This transaction is an
  interest-bearing loan.

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• e- Buying through a (0APR) finance is
  permissible.
• It means that the client is borrowing a free of
  interest loan.

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• g-Late fees are Riba as long as the price is
  determined and agreed upon. Muslim clients
  should find another provider with no late fees.
  If he can not find any (which is most probably
  the case), he can buy and avoid late payment by
  paying on time.

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10-Investing In (401)K Plan

• Employees have the right to choose from different
  categories of investment, they can be
• Stable Value Fund ( saving account), (certified
  deposit, bonds)
• Balanced Fund (50 stocks,50 bonds)
• Mutual Funds (Islamic Mutual Funds)
• International Stock Fund
• Emerson Stock as a part of the
• Employee Stock Ownership Plan (ESOP)

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• Restrictions
• Any guaranteed profit is not allowed (Like stable
  value fund and bonds )
• Possession or even transaction with stocks of
  companies who conduct prohibited business
  (Obscene, Alcohol, Tobacco, Gambling,
  conventional bank, casino and entertainment,
  mortgage company, musical Instruments, etc..) is
  prohibited.
• (Islamic Mutual Fund) companies might help
• in determining companies who conduct lawful
  business. Scholars say one should purify their
  profits in accordance to the percentage of haram
  income.

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• 12- Buying a house via conventional mortgage
• a- Any conventional mortgage contains two
  different transactions
• Loan contract Where the mortgage company pays
  the price of the house to the owner on behalf of
  its client and then charge him the original
  amount plus a percentage on a long term basis.
• Mortgage contract Where the mortgage company
  holds the title (deed) as a (Lien holder) to
  secure their money.

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• b- The first contract of the above transaction
  is absolutely prohibited since it is the exact
  Riba mentioned in the Quran, Riba of loans ???
  ??????
• c- To permit such a contract, the bank should buy
  the house, write its name on the title as an
  owner, and NOT as a lien holder, assume the risk
  of any possible damage, and completely own the
  property.

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• In a different, independent, and non-stipulated
  contract, the bank can sell the house to the
  client,
• ??? ???? ???? ??? ???? ???? ? ??? ?? ??? ?? ??
  ???? ? ?? ??? ?? ?? ????
• meaning Selling a commodity before possessing
  it is prohibited and gaining profit without
  assuming the risk is prohibited too.

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• d- Murabaha
• Islamic bank buys the house, then sells it to
  you.
• You pay in monthly installments.
• The Islamic bank cannot charge you late fees or
  repossess the entire house if you miss a payment.
  They have to work with you.

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• Diminishing Musharaka
• The Islamic Bank is a partner with you in buying
  the house.
• You make two monthly payments, one towards rent
  on the part of the house the bank owns, and one
  towards purchase part of the house from the bank.
• Eventually you own the house completely.

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• e- Many Muslim scholars do not agree with the
  fatwa of The European Council for Fatwa and
  Research, declaring the permissibility of buying
  houses via conventional mortgage process for
  residential purposes.
• f- No necessity exists to buy a house in the U.S,
  even for residential purposes. The only necessary
  thing is to find a place/domicile to live in,
  safely and securely, which could be achieved
  through renting a house.

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• g-Necessity (Daroora) in Shariah means something
  that must be done in order to avoid harm to life
  or limb.

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• h- Here are some alternatives to conventional
  mortgages
• Renting an apartment
• Renting a house
• Increasing the income or having an over- time
  work to afford a house.
• Moving to another state/ country for a better
  situation.
• Finding an Islamic finance to buy a house.
• Support from the Muslim community to find a
  solution.

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• 13- Late registration fees
• a- Some academic institutions offer three options
  of payment for their students
• Discounted fees for early registration
• Regular fees for on-time registration
• Late fees for late registration.
• b- All three options are allowed since no
  contract or agreement has been done yet.

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• c- The only case where late fees are prohibited
  is when the institute charges the client a
  financial penalty because of his late payment, or
  when the monthly payment is agreed upon and there
  is a penalty for delayed payment. Late fee is
  different from late registration.

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• 14-Status of money from loans after repentance.
• Two different cases
• A- Previous transactions
• Buying a house via conventional mortgage or taken
  a Riba based loan is prohibited, but if a Muslim
  wants to repent to Allah, he should regret what
  he did, and resolve never to return to it.
• He can keep the loan money or the house, and
  there will be no sin on him after his repentance.

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• ??? ???? ????? ?? ??? ?????? ??? ????? ? ???? ???
  ????
• Meaning, So whomever receives an admonition from
  his Lord and stops taking Riba shall not be
  punished for the past, his case will be judged by
  Allah. But whomever returns to Riba, such are the
  dwellers of the fire.

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• B- Current transactions
• It is not the case if a Muslim is a lender who
  has an on-going usurious loan.
• Repenting in this situation must prevent him from
  taking any extra money over the original debt.
• Meaning (and if you repent, then you should take
  back your capital only, without oppressing
  others or being oppressed by them).

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• 15- Monetary Gifts
• Examples
• A store refund of 20 when purchasing a minimum
  of 300
• A 50 credit when opening a new bank account.
• Cash back on a credit card.
• The above examples and many more are in the
  opposite of usury, since the seller in the first
  example and the bank in the second example are
  waving there rights to attract more
  costumers.(??? ? ?????? ?)
• Taking advantage of this offer is permissible.

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• 16-Non-Monetary Gifts
• Air mileage with minimum amounts of purchasing.
• Gifts when purchasing from a store /opening a
  bank account.
• Entering into a free raffle to win a car.
• Buy one, get one free.
• Using a coupon with the discount.
• The above examples and many more are in the
  opposite of usury, since the financer, credit
  company, and the seller are waving there rights
  to attract more costumers.

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• 20- Working in a company that has some
  Riba transactions for non-Muslim customers .
• The core business should be permissible.
• A Muslim should not be involved in any usuries
  transaction.

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• Although avoiding such a company is better, there
  is no sin if one is not involved in Riba.
• If the work involves any explicit involvement in
  Riba, the Muslim should avoid it.

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23-Student loans

• In the United States, there are two different
  kinds of student loan
• A- Subsidized Loan
• The government pays the interest on the loan
  while the student is in school, during the
  six-month grace period, and during any deferment
  period. Subsidized loans are awarded based on
  financial need.

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• B-Unsubsidized Loan
• An unsubsidized loan is a loan for which the
  government does not pay the interest. The
  borrower is responsible for the interest on an
  unsubsidized loan from the date the loan is
  disbursed, even while the student is still in
  school.
• Unsubsidized loans are not based on financial
  need .

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• Subsidized loan is allowed as long as the student
  
• 1-Needs the loan.
• 2-pays the loan back during the grace or
  deferment period.
• Failure in paying in full before the due date
  will convert the loan into an interest-loan from
  the date the loan was disbursed

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• As of the unsubsidized loan, it is prohibited
• since it is an interest-bearing loan.
• Studying in a university ,and having a degree is
  not a necessity in which prohibited matter could
  be permitted.
• Subsidized loan is the alternative.

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Conclusion

• Almost, all the contemporary usurious
  transactions are among the ( usurious loan
  contract) ??? ???????? ?? ??? ??????.
• Usury could be avoided, even in a capitalist
  economic system.
• Our responsibility in providing the Islamic
  alternative.