Where to I apply for an interest-free loan?
mbs
So there's no debt, just equity. Has anyone done work on how this works in
practice?
At 01:42 PM 9/17/01 -0700, you wrote:
>< http://www.usc.edu/dept/MSA/economics/nbank1.html >
>Principles Of Islamic Banking
>[This article was published in the 10th issue of Nida'ul Islam
>magazine, November-December 1995]
>----------------------------------------------------------------------
>----------
>
>For millions of Muslims, banks are institutions to be avoided. Islam
>is a religion which keeps Believers from the teller's window. Their
>Islamic beliefs prevent them from dealings that involve usury or
>interest (Riba). Yet Muslims need banking services as much as anyone
>and for many purposes: to finance new business ventures, to buy a
>house, to buy a car, to facilitate capital investment, to undertake
>trading activities, and to offer a safe place for savings. For Muslims
>are not averse to legitimate profit as Islam encourages people to use
>money in Islamically legitimate ventures, not just to keep their funds
>idle.
>
>However, in this fast moving world, more than 1400 years after the
>Prophet (s.a.w.), can Muslims find room for the principles of their
>religion? The answer comes with the fact that a global network of
>Islamic banks, investment houses and other financial institutions has
>started to take shape based on the principles of Islamic finance laid
>down in the Qur'an and the Prophet's traditions 14 centuries ago.
>Islamic banking, based on the Qur'anic prohibition of charging
>interest, has moved from a theoretical concept to embrace more than
>100 banks operating in 40 countries with multi-billion dollar deposits
>world-wide. Islamic banking is widely regarded as the fastest growing
>sector in the Middle Eastern financial services market. Exploding onto
>the financial scene barely thirty years ago, an estimated $US 70
>billion worth of funds are now managed according to Shari'ah. Deposit
>assets held by Islamic banks were approximately $US5 billion in 1985
>but grew over $60 billion in 1994.
>
>The best known feature of Islamic banking is the prohibition on
>interest. The Qur'an forbids the charging of Riba on money lent. It is
>important to understand certain principles of Islam that underpin
>Islamic finance. The Shari'ah consists of the Qur'anic commands as
>laid down in the Holy Qur'an and the words and deeds of the Prophet
>Muhammad (s.a.w.). The Shari'ah disallows Riba and there is now a
>general consensus among Muslim economists that Riba is not restricted
>to usury but encompasses interest as well. The Qur'an is clear about
>the prohibition of Riba, which is sometimes defined as excessive
>interest. "O You who believe! Fear Allah and give up that remains of
>your demand for usury, if you are indeed believers." Muslim scholars
>have accepted the word Riba to mean any fixed or guaranteed interest
>payment on cash advances or on deposits. Several Qur'anic passages
>expressly admonish the faithful to shun interest.
>
>The rules regarding Islamic finance are quite simple and can be summed
>up as follows:
>
>a) Any predetermined payment over and above the actual amount of
>principal is prohibited.
>Islam allows only one kind of loan and that is qard-el-hassan
>(literally good loan) whereby the lender does not charge any interest
>or additional amount over the money lent. Traditional Muslim jurists
>have construed this principle so strictly that, according to one
>commentator "this prohibition applies to any advantage or benefits
>that the lender might secure out of the qard (loan) such as riding the
>borrower's mule, eating at his table, or even taking advantage of the
>shade of his wall." The principle derived from the quotation
>emphasises that associated or indirect benefits are prohibited.
>
>b) The lender must share in the profits or losses arising out of the
>enterprise for which the money was lent.
>Islam encourages Muslims to invest their money and to become partners
>in order to share profits and risks in the business instead of
>becoming creditors. As defined in the Shari'ah, or Islamic law,
>Islamic finance is based on the belief that the provider of capital
>and the user of capital should equally share the risk of business
>ventures, whether those are industries, farms, service companies or
>simple trade deals. Translated into banking terms, the depositor, the
>bank and the borrower should all share the risks and the rewards of
>financing business ventures. This is unlike the interest-based
>commercial banking system, where all the pressure is on the borrower:
>he must pay back his loan, with the agreed interest, regardless of the
>success or failure of his venture.
>
>The principle which thereby emerges is that Islam encourages
>investments in order that the community may benefit. However, it is
>not willing to allow a loophole to exist for those who do not wish to
>invest and take risks but rather content with hoarding money or
>depositing money in a bank in return for receiving an increase on
>these funds for no risk (other than the bank becoming insolvent).
>Accordingly, under Islam, either people invest with risk or suffer
>loss through devaluation by inflation by keeping their money idle.
>Islam encourages the notion of higher risks and higher returns and
>promotes it by leaving no other avenue available to investors. The
>objective is that high risk investments provide a stimulus to the
>economy and encourage entrepreneurs to maximise their efforts.
>
>c) Making money from money is not Islamically acceptable.
>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. Muslim jurists consider
>money as potential capital rather than capital, meaning that money
>becomes capital only when it is invested in business. Accordingly,
>money advanced to a business as a loan is regarded as a debt of the
>business and not capital and, as such, it is not entitled to any
>return (i.e. interest). Muslims are encouraged to purchase and are
>discouraged from keeping money idle so that, for instance, hoarding
>money is regarded as being unacceptable. In Islam, money represents
>purchasing power which is considered to be the only proper use of
>money. This purchasing power (money) cannot be used to make more
>purchasing power (money) without undergoing the intermediate step of
>it being used for the purchase of goods and services.
>
>d) Gharar (Uncertainty, Risk or Speculation) is also prohibited.
>Under this prohibition any transaction entered into should be free
>from uncertainty, risk and speculation. Contracting parties should
>have perfect knowledge of the counter values intended to be exchanged
>as a result of their transactions. Also, parties cannot predetermine a
>guaranteed profit. This is based on the principle of 'uncertain gains'
>which, on a strict interpretation, does not even allow an undertaking
>from the customer to repay the borrowed principal plus an amount to
>take into account inflation. The rationale behind the prohibition is
>the wish to protect the weak from exploitation. Therefore, options and
>futures are considered as un-Islamic and so are forward foreign
>exchange transactions because rates are determined by interest
>differentials.
>
>A number of Islamic scholars disapprove the indexation of indebtedness
>to inflation and explain this prohibition within the framework of
>qard-el-hassan. According to those scholars, the creditor advances the
>loan to win the blessings of Allah and expects to obtain the reward
>from Allah alone. A number of transactions are treated as exceptions
>to the principle of gharar : sales with advanced payment (bai'
>bithaman ajil); contract to manufacture (Istisna); and hire contract
>(Ijara). However, there are legal requirements for the conclusion of
>these contracts to be organised in a way which minimises risk.
>
>e) Investments should only support practices or products that are not
>forbidden -or even discouraged- by Islam. Trade in alcohol, for
>example would not be financed by an Islamic bank; a real-estate loan
>could not be made for the construction of a casino; and the bank could
>not lend money to other banks at interest.
Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine
