Download IAU Plan - ImamFaisal.com

The Fiqh of
Islamic
Financing
Presented by
Imam Faisal Ahmad,
with thanks to the Islamic American
University
1
‫‪Riba‬‬
‫‪The only sin in the Quran in which Allah‬‬
‫‪(SWT) declares war against those who‬‬
‫‪commit it.‬‬
‫(يا أيها الذين امنوا اتقوا هللا وذروا ما بقي من الربا إن كنتم‬
‫ب من هللا ورسوله‪،‬وإن تبتم‬
‫مؤمنين‪،‬فإن لم تفعلوا فاذنوا بحر ٍ‬
‫فلكم رؤوس أموالكم ال تظلمون وال تُظلمون)‬
‫‪2‬‬
‫‪‬‬
Riba is Haram



Allah (SWT) and His Prophet (PBUH) curse
those who are involved in usurious transaction.
)‫(لعن هللا اكل الربا ومؤكله وكاتبه وشاهديه‬
 ‫(لعن رسول هللا صلى هللا عليه وسلم اكل الربا ومؤكله وكاتبه‬
)‫هم سواء‬:‫وقال‬،‫وشاهديه‬
Taking Riba and giving it to others are the same
!even witnesses and the one who documents the
usury are cursed too !
3
‫‪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:‬‬
‫اَّللِ َو َما ُه َّ‬
‫سو َل َّ‬
‫ن قَال ‪‬‬
‫س ْب َع ْال ُمو ِبقَا ِ‬
‫ْ‬
‫اجت َ ِنبُوا ال َّ‬
‫ت قَالُوا يَا َر ُ‬
‫الس ْح ُر َوقَتْ ُل النَّ ْف ِس الَّتِي َح َّر َم َّ‬
‫الش ْر ُك ِب َّ‬
‫ق‬
‫اَّللِ َو ِ‬
‫ِ‬
‫اَّللُ ِإال ِب ْال َح ِ‬
‫الربَا َوأ َ ْك ُل َما ِل ْاليَ ِت ِيم َوالت َّ َو ِلي يَ ْو َم َّ‬
‫ف‬
‫الز ْح ِ‬
‫ف َوقَ ْذ ُ‬
‫َو َأ ْك ُل ِّ‬
‫ت ْالغَافِالت‬
‫ت ْال ُمؤْ ِمنَا ِ‬
‫صنَا ِ‬
‫ْال ُم ْح َ‬
‫‪4‬‬
‫‪‬‬
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.
5
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.
6
Transactions at a glance
1-Bank Loans
2-Late Fees or Charges
3-Credit Cards
4-Debit Card
5-Saving Account
7
6-Checking Account
7-Financing
8-“lease to purchase” option.
9-Investing In (401)K Plan
8
10-Buying a house via conventional
mortgage and according to Shariah
11-University Late registration fees
12-Status of money from loans after
repentance.
9
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.
10
1- Meaning of Usury (Riba)
Usury (Riba) in Arabic lexicography:
Excess,addetion, increase ,to add.
Example from the Quran “‫”ويربي الصدقات‬
 In Islamic jurisprudence: increase or delay
when exchanging specific commodities in
specific transactions.
ٍ ‫الزيادة أو التأخير في أموا ٍل محدود ٍة في معامال‬
‫ت محدود ٍة‬

11
2- The two kinds of usury:
A - Riba of increase ‫ربا الفضل‬:
When the amount paid back exceeds the
original debt or, gaining any benefit out of
the debt
B - Riba of delay ‫ربا النساء‬:
When the payment is delayed or deferred after
its due date.
12
‫‪3- Usurious Transactions‬‬
‫عن أيب سعيد اخلدري قال قال رسول هللا صلى هللا عليه وسلم‬
‫الذهب ابلذهب مثل مبثل يد بيد والرب ابلرب مثل مبثل يد بيد‬
‫والفضة ابلفضة مثل مبثل يد بيد والتمر ابلتمر مثل مبثل يد بيد‬
‫والشعري ابلشعري مثل مبثل يد بيد وامللح ابمللح مثل مبثل يد بيد‬
‫فمن زاد واستزاد فقد أرىب اآلخذ واملعطي سواء‬
‫‪13‬‬
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 ‫ربا‬
‫ ”الفضل‬. 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.”
‫كل قرض جر نفعا فهو ربا‬
14
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 it’s among non-profit
contracts (‫ )عقود التبرعات‬where 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.
15
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:

16



Equality ‫التماثل‬: It should be the same
amount, to avoid Riba of increase.
Mutual Submission ‫التقابض‬: It should be
exchanged at the same time, to avoid Riba of
delay.
Finalization “ ‫”الحلول‬: The completion of the
transaction without deferring to the future (in
other words, it has to be effective
immediately).
17
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 “‫”التقابض‬
Finalization “‫”الحلول‬
Equality is not required .
18
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.
‫نهى رسول هللا صلى هللا عليه و سلم عن بيع الكالئ بالكالئ‬
19
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.
20

If any of the aforementioned conditions are
not completely fulfilled, then the transaction is
an interest-bearing contract, and it’s definitely
prohibited.
21
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

22
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 ( ‫ ) قبض‬Riba leaves
the door open to the unknown (gharar).
Usury and injustice are synonyms !!
23
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 Qur’an and the Sunna
“‫”يا أيها الذين امنوا اتقوا هللا و ذروا ما بقي من الربا إن كنتم مؤمنين‬
‫وقال‬،‫وشاهديه‬،‫ وكاتبه‬، ‫ وموكله‬،‫”لعن رسول هللا صلى هللا عليه وسلم اكل الربا‬
“‫هم سواء‬
Borrowing to invest or to purchase does not change the rule.
24
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 interestbearing activity.
25
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.
26
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).
27

Payment plan (on a monthly basis).
c- The above conditions are usurious.
Agreeing to this is prohibited.
28
d- Scholars differentiate between two kinds of
prohibited matters:

‫ حرام لذاته‬prohibited by itself, like paying riba
for others, taking it from others, adultery,
drinking alcohol, etc.

‫ حرام لغيره‬prohibited because of its
consequences, like agreeing to pay late fees
(without paying it yet).
29
e- The reason behind this classification is
that:
Whatever is prohibited by itself would be
permitted in case of necessity, while what’s
prohibited because of its consequences
becomes permissible in case of true and
public need.
30
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.
31
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.
32
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.
33

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 .
(‫)عقد وكالة‬
34
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.

35
5- Debit Card:
a- It is an easy way to withdraw from the client’s
checking account.
b-Annual fees are allowed.
c- Service fees for withdrawing cash are allowed
too.
36
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.
37
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 it’s 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.
38
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.
39
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.
40
d- In case there are Islamic banks available, a
Muslim is prohibited from having a checking
account in any conventional bank,
‫ومن يشفع شفاعة ً سيئة ً يكن له كفل ٌمنها‬
meaning, “Whoever participates in conducting
bad deeds ,will share in the punishment.“
41
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.
42
c- Purchasing through a third party in the U.S
means that the third party—i.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.
43
e- Buying through a (0%APR) finance is
permissible.
It means that the client is borrowing a free of
interest loan.
44
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.
45
10-Investing In (401)K Plan
Employees have the right to choose from different
categories of investment, they can be:
1.
Stable Value Fund ( saving account), (certified
deposit, bonds)
2.
Balanced Fund (50% stocks,50% bonds)
3.
Mutual Funds (Islamic Mutual Funds)
4.
International Stock Fund
5.
Emerson Stock as a part of the
Employee Stock Ownership Plan (ESOP)
46
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.
47
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.
48
b- The first contract of the above transaction is
absolutely prohibited since it is the exact Riba
mentioned in the Qur’an, Riba of loans “ ‫ربا‬
‫”الديون‬
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.
49
In a different, independent, and non-stipulated
contract, the bank can sell the house to the client,
‫نهى رسول هللا صلى هللا عليه و سلم عن بيع ما لم يقبض و عن ربح‬
‫ما لم يضمن‬
meaning: “Selling a commodity before possessing it
is prohibited and gaining profit without assuming
the risk is prohibited too.”
50
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.
51

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.
52
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.
53
g-Necessity (Daroora) in Shariah means
something that must be done in order to
avoid harm to life or limb.
54
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.
55
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.
56
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.
57
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.
58
‫فمن جاءه موعظة من ربه فانتهى فله ماسلف و أمره إلى‬
‫هللا‬
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.”

59
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).
60
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.(ٌ ‫)هبة ٌ مشروطة‬
Taking advantage of this offer is permissible.
61







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.
62


20- Working in a company that
has some Riba transactions for nonMuslim customers .

The core business should be permissible.
A Muslim should not be involved in any
usuries transaction.

63


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.
64
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 sixmonth grace period, and during any deferment
period. Subsidized loans are awarded based
on financial need.
65
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 .
66
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

67
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.

68
Conclusion



Almost, all the contemporary usurious
transactions are among the ( usurious loan
contract) ‫ربا الجاهلية أو ربا الديون‬.
Usury could be avoided, even in a capitalist
economic system.
Our responsibility in providing the Islamic
alternative.
69