Riba, interest and Islamic banking: a study of the prohibition of riba in Islam and the modern attempts at implementing it in the context of Islamic banking
Document TypePhD thesis
CitationSaeed, A. (1992). Riba, interest and Islamic banking: a study of the prohibition of riba in Islam and the modern attempts at implementing it in the context of Islamic banking. PhD thesis, Faculty of Arts, The University of Melbourne.
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© 1992 Dr. Abdullah Saeed
The major objective of the thesis is (i) to examine critically the traditional interpretation of riba in Islam, which has been espoused by the neo-revivalists in the modern period, and (ii) to highlight the necessity for re-examining this interpretation, according to which riba covers any increase accruing to the creditor in a debt/loan transaction, and, hence, interest. The thesis first identifies main characteristics of the two major trends of modern Islamic thought, namely Modernism and Neo-revivalism, and indicates that the intellectual framework of Islamic banking theory, which is based on the traditional interpretation of riba, was provided by the neo-revivalists. It, then, traces the economic and political factors which led to the emergence of Islamic banks in the 1960s onwards. The thesis then, proceeds to a detailed analysis of the concept of riba in the Qur'an, examining the moral and humanitarian context of the prohibition, supporting this by tracing the features of riba practised in the pre-Islamic period which was prohibited in the Qur'an, using the early exegetical sources. Prohibition of riba in the Sunnah is also examined and it was found that the focus of the prohibition in the Sunnah was on certain forms of sales, not loans or debts as in the case of the Qur'an. The concept of riba in the Figh (Islamic law) literature is examined to find whether it took into account the moral-humanitarian context of the prohibition in the Qur'an. It was found that the theory of riba in the Figh literature is rather mechanistic, and is not concerned with the circumstances and the context of what the Figh regards as riba transactions. Having discussed the theoretical side of the issue of riba in the Qur'an, Sunnah and Figh, the thesis goes on to illustrate on the basis of hiyal (stratagems) literature and historical evidence that riba as interpreted traditionally appears to have been circumvented by Muslims, from the first two centuries of Islam until the modern period, by means of hiyal permitted by the major and schools of law. The thesis, then, identifies views of modernists and neo-revivalists on the meaning of riba and its possible application to modern bank interest, and argues that the neo-revivalist approach which has adopted the traditional interpretation as untenable and shows major weaknesses in their view of riba as interest. Since the traditional interpretation of riba which was espoused by the neo-revivalists rejects interest as riba, Islamic banking theorists have argued that it is Profit and Loss Sharing (PLS), not interest, which should be the basis of Islamic banking. The theorists identified the two concepts of mudaraba and musharaka as the PLS mechanisms of Islamic banking. Our analysis of the two concepts indicated that although in theory the two concepts were meant to be PLS concepts, in Islamic banking practice they have virtually become short-term predetermined-return based financing mechanisms. We further examined a third concept, murabaha, which Islamic banking has espoused in practice for more than seventy-five percent of their investment operations. Our analysis showed that murabaha as practiced under Islamic banking is hardly different from interest. In short, the analysis of the three concepts indicated that it is interest-like predetermined-return based financing which is dominant in Islamic banking practice, not PLS. To complement the analysis, the legalistic nature of the relationship between the Islamic bank and its depositors as well as possible inequity towards these depositors were also briefly examined. We further investigated the approach of the Religious Supervisory Boards (RSBs) of Islamic banks to discover to what extent their opinions on Islamicity of Islamic banking practice is based on ijtihad and/or taqlid. A critique of RSB approach which could generally be characterised as 'imitative' was also made, arguing for fresh ijtihad in matters related to banking and finance in order to develop viable modern financial institutions on the basis of the overall guidance given in the Qur'an and its concern for equity and justice. Finally we examined the performance of one of the most successful Islamic banks, Faisal Islamic Bank of Egypt, comparing it with other interest-based joint venture commercial banks (JVCBs) in Egypt to see whether or not the performance of FlBE was better than others, and whether or not the end result of the Islamic bank was different from other interest-based banks. The analysis indicated that the Islamic bank is not different from other interest-based banks at least as far as the end results are concerned. Our analysis of riba at conceptual and practical levels indicates that there appears to be a need for looking at riba afresh rather than attempting to erect a banking and financial structure on the basis of traditional interpretation which neither appears to be justifiable in the light of the moral-humanitarian emphasis of the Qur'an, nor practical as the long history of the utilisation of stratagems among Muslims as well as Islamic banking practice amply demonstrate.
KeywordsIslamic law; interest
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