Part 5 of 5: Is Interest a 'Necessity'? 

Unsubscribe Web Version
Please enable images to view this content
Email RSS Feed LinkedIn YouTube
Please enable images to view this content

Is Interest a 'Necessity'?

This is part 5 of 5 of our series highlighting key arguments and refutations from Mufti Taqi Usmani and others in the "Historic Judgment on Interest" delivered at the Supreme Court of Pakistan in 1999. Please note that the data contained in the judgment is from 1999.

Argument

Though modern interest-based transactions are covered by the prohibition of 'riba,' yet commercial interest is the back-bone of the modern economy. Islam, being a practical religion, recognizes the principle of necessity and permits eating pork in extreme situations for survival. The same principle of necessity should be applied to interest-based transactions and the laws permitting interest should not be declared repugnant to Islamic injunctions.

Refutation

This argument asserts itself based on the doctrine of necessity. While Islam is realistic and does not demand the impossible — the doctrine of necessity is not a vague concept but in fact one founded on sound principles. It requires a certain criteria be met before it is considered applicable to a given situation. The necessity must be real; one that cannot be met with except by the impermissible.

Based on this understanding, the doctrine of necessity does not apply to interest. Let’s see how.

There is a common misconception that eradicating interest is synonymous to converting banks and financial institutions to charities; no return for the bank or depositors. This is untrue. While the concept of a loan as it exists in the modern economy today has no basis in an Islamic economic system- the shift from conventional to Islamic finance does not entail extending interest-free loans rather it is basing transactions on well worked out modes of finance which are not without return and of which profit and loss sharing is one.

Another misconception is that Islamic finance is not yet developed or practiced widely enough to be depended upon to support an entire economy.

Islamic banking and finance is not an idea in theory but in fact a system that has been worked upon by jurists and economists for the last half century. The results of these efforts started turning into a reality in the 70s — since then Islamic banks have grown in number now reaching more than 200 across 65 countries of the world with US$90 billion capital at a growth rate of 15% per annum.

The Islamic Development Bank’s views on the feasibility of a paradigm shift from conventional to Islamic banking:

"The experience accumulated by Islamic banks, in general, and the Islamic Development Bank in particular, as well as attempts made in a number of Muslim countries to apply an Islamic financial system, indicate that the application of such an Islamic system by any Muslim country, at the national level, is feasible. According to the data compiled by the International Union of Islamic Banks, there are 176 Islamic banks and institutions in the world. In terms of number, 47% of these institutions are concentrated in South and South East Asia, 27% in GCC and Middle East, 20% in Africa and 6% in the Western countries. In terms of deposits, amounting to US $112.6 billion and total assets amounting to US $147.7 billion. 73% of the activities of these institutions are concentrated in the GCC and the Middle East. IDB alone, since its inception from 1976 to 1999, has provided financing in the range of US $21.0 billion. As against a growth rate of 7% per annum recorded by the global financial services industry, Islamic banking is growing at a rate of 10-15% per annum and accounts for 50-60% of the share of the market in the GCC and Middle East."

"Islamic banking is distinctive in two respects: concentrating on the real sector of the economy, it imparts tremendous stability to the economic system by achieving an identity between monetary flows and goods and services, and by operating on a system of profit and loss sharing in its evolved state, it insulates the society from the debt-mountain on the analogy that if the economies enter into recessionary or deflationary phases, the principles of profit and loss sharing protects the states and economic operators from the evils of accumulation of interest and minimizes defaults and bankruptcies."

No doubt the Islamic finance industry is still a nascent industry dealing with a numerous issues at various levels but there is sufficient evidence to disprove that it is unable to sustain an economy.

The fact is that though the elimination of interest from an entire economy is a great deal more challenging than from an institution alone — it is possible. There are many places where abolishing interest is much easier for governments than it is for private Islamic banks. This is because many Islamic banks in various parts of the world have no support from governments or central banks at all where adherence to non-Islamic local regulatory frameworks is a necessary prerequisite to their functions.

In places where an interest-free system and regulatory framework is introduced and established by the government, Islamic banks will be unimpeded as will the government in ensuring an economy based on the equitable principles of Islam.

Without this overriding enforcement at government level, Islamic banks struggle to compete with conventional banks. When no banks offer interest-based financing — this problem is overcome.

As far as foreign debt at government level is concerned its conversion to Islamic financing modes has been elaborated upon in the IDB’s reports. The thrust of the reports is that project-financing is not only a Shariah-compliant alternative but will also go a long way to curb corruption and fund misappropriation.

(To examine the features of Islamic banking in detail, please look at our modules designed on specific Islamic banking products available here. To see the devastating effect of foreign debt on the economies of developing countries watch our video: Why Islamic Finance?)

Many leading bankers and highly qualified international finance practitioners are unanimous that Islamic financing modes are not only feasible but in fact geared to ensuring a stable and thriving economy — there are reports based on real facts and figures to corroborate their views.

Based on this discussion, the claim that the interest-based system qualifies as permissible on the grounds of the doctrine of necessity is dismissed. 

The conversion to Islamic finance may take time but as the evidence suggests, it is a practicable and viable alternative to conventional interest-based finance.

Previous parts of this series can be accessed here:

Part 1 of 5: Is the Definition of Riba Ambiguous?

Part 2 of 5: Does the Word 'Riba' Only Refer to Excessive Interest?

Part 3 of 5: Does the ‘Riba’ in the Quran Also Refer to Modern Commercial Loans?

Part 4 of 5: Are There Interest-Based Loans the Quran Permits?


Source: The Historic Judgment on Interest, Mufti Taqi Usmani, et al., Supreme Court of Pakistan







Officially AAOIFI Recognized



Officially recognized by AAOIFI (pronounced “a-yo-fee”), the world’s leading standard-setting body in Islamic finance, Ethica's award-winning Certified Islamic Finance Executive (CIFE) and Advanced CIFE (ACIFE) earn you continuing professional development (CPD) credits





What CIFE and ACIFE Graduates Say...


"Ethica’s CIFE has already opened doors for me..."
 Boyd Ruff
 Esq., USA          

                                                              

"The course is brilliant."
Mufti Faraz Adam, UK

"I chose Ethica’s certification as it has an excellent reputation in the market and now I understand why. All the different modules cover the most important types of contracts from both a theoretical as well as a practical perspective and are complemented by a lot of clear examples. And the self-paced training permits excellent time management. I recommend the CIFE from Ethica Institute to everybody seriously interested in learning about Islamic finance."
Daniel Rasqui
Director, Product Support and IT, SIX Financial Information, Luxembourg                                                            

"Ethica's program exceeded my expectations. Ethica's certification excelled at offering real world examples and timely tactical instruction in a user-friendly format. I enthusiastically recommend Ethica's program to anyone who seeks to develop an appreciation for and understanding of Shariah-compliant financing."
William R. Gregory
Director, C3 International                                                                        

Read more testimonials (here)


Haven't Experienced Ethica's Award-Winning Training Yet?

Training Video

Play a video from Ethica’s award-winning CIFE program

CIFE & ACIFE graduates have likened the knowledge gained from Ethica’s certification to actually working inside an Islamic bank. Ethica puts you ahead of the curve by training you in the practical aspects of Islamic banking without overwhelming you with theory. Play one of our videos (click here) to experience the quality and depth of our training.


Download Ethica's Handbook of Islamic Finance

Training Video

700+ Pages of Premium Content Free...

- Mufti Taqi Usmani’s “Introduction to Islamic Finance”
- Sample Islamic finance contracts
- Recommended reading lists
 - 1,000+ Islamic finance Q&As

Download Now


About Ethica Institute of Islamic Finance

Certificate

Couriered to your doorstep at no extra charge, your framed certificate will handsomely adorn your office or study for years to come. Custom-mounted and framed by hand, this beautiful certificate was designed by classically-trained Islamic artists and third-party accredited to comply with AAOIFI, the world’s leading Islamic finance standard.

Ethica is trusted by more professionals for Islamic finance certification. Officially recognized by AAOIFI, the world's leading standard-setting body in Islamic finance, the Institute has trained over 15,000 paying professionals in 160 financial institutions across 65 countries, winning numerous industry awards. Ethica’s globally recognized and accredited award-winning certificates include the Certified Islamic Finance Executive™ (CIFE™), Advanced CIFE™ Financial Analysis (ACIFE™ FA), and Advanced CIFE™ Accounting (ACIFE™ ACC), delivered online or live at the bank.

Ethica's Recent Awards

2020 Best Islamic Finance Education Provider—United States (Cosmopolitan Daily, UK)
2020 Best Islamic Finance Qualification—United States (Cosmopolitan Daily, UK)
2020 Winner for Courses & Trainings UAE (Finance Monthly Legal, UK)
2020 Niche Training Services Provider of the Year—International (ACQ5 Global Awards, UK)
2020 Research and Education Company of the Year—United States (ACQ5 Law Awards, UK)
2020 Best Practice Operator of the Year in Islamic Finance—MENA (ACQ5 Country Awards, UK)
2020 Game Changer Award (Finance Monthly, UK)
2020 Management Consulting Awards (CEO Today Magazine, UK)
2020 Islamic Finance Advisor of The Year (Finance Monthly M&A Awards, UK)
2020 Islamica 500 Prominent and Influential in the Islamic Economy (Belgium)



Our Learners and Clients Come From…


Disclaimer: This email is for information and illustrative purposes only. It is not, and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action. Ethica Institute LLC does not purport to and does not, in any fashion, provide tax, accounting, actuarial, record keeping, legal, broker, dealer or any related services. You should consult your advisors with respect to these areas and the material presented herein. You may not rely on the material contained herein. Ethica Institute LLC shall not have any liability for any damages of any kind whatsoever relating to this material.

 © 2021 Ethica Institute of Islamic Finance 

Sunset Lake Rd. Newark, DE 19702 United States