Updated-24Dec08-4:13pm
I’ve been meaning to write about this topic for a long, long, long time. Didn't have the courage then, and now, I still feel I didn't have as much knowledge as I need to have, in explaining the widespread use and implications of using Riba' in Finance. But try, I must. I was trained in Finance but never really got to use all the skills acquired in the same field of work (for me this is a huge blessing). What sticks to me glaringly is that the central concept in Finance is also the strongest prohibition in Islam - and that is the concept of 'interest' - or Riba', as strongly prohibited in Islam. And as Muslims, we are duped into accepting this concept of 'interest' as mundane, and are encouraged in its widespread use across all facets of our daily life. I would like to change this point of view for all Muslims. It is my highest hope that those who read these notes would share their views and critique in clarifying and exploring further these concepts, explained within these limited set of notes.
I’ve been meaning to write about this topic for a long, long, long time. Didn't have the courage then, and now, I still feel I didn't have as much knowledge as I need to have, in explaining the widespread use and implications of using Riba' in Finance. But try, I must. I was trained in Finance but never really got to use all the skills acquired in the same field of work (for me this is a huge blessing). What sticks to me glaringly is that the central concept in Finance is also the strongest prohibition in Islam - and that is the concept of 'interest' - or Riba', as strongly prohibited in Islam. And as Muslims, we are duped into accepting this concept of 'interest' as mundane, and are encouraged in its widespread use across all facets of our daily life. I would like to change this point of view for all Muslims. It is my highest hope that those who read these notes would share their views and critique in clarifying and exploring further these concepts, explained within these limited set of notes.
The intent of these notes is nothing more than a simple attempt to guide Muslims in our continuing efforts to uncover the truths (and expose the untruths) about Riba' (and its prohibition in Islam) - which is the concept of 'interest', that for decades have long been a divisive issue within the Muslim world, and that have been cleverly and deceptively embedded deep in the fundamental principles of Finance - the body of knowledge that impacts every facet of life of almost every individual on Earth through the most expedient and convenient means of 'economy' – the exchange and transaction of money. The aim is not to redefine Riba' (and its prohibition in Islam) - readers can easily find scores of literatures in this area which have direct/specific references to the Qur'an & Sunnah, but simply to share with the world in understanding how Riba' is, fundamentally, the central concept in Finance. I will try my best to point readers to instances how and where Riba' is used in mathematical calculations of the various concepts in Finance (i.e. in financial management [business finance], banking [money & capital markets], and investments [securities, bonds, mutual funds]). I strongly invite those in this field of expertise to also chip in with your views and take on these notes, to help clarify these notes, and to give your continuing support in this far-reaching effort.
And this effort may take several editions to these initial set of notes, evolving in contents over time, and expanding in depths and breadths from many contributors, commenters, and posters on and off this site – your patience is most appreciated. Keep checking these notes for updates. Initially, these notes may not be as extensive as need be to cover all the facts and issues about this huge topic, nonetheless, they can be starting points for further discussion or structured research into this field/concept. InsyaAllah, in time, they can serve as alternative sources of reference to help us in understanding more of this topic on Riba'. The ultimate divine source is the Qur'an & Sunnah. May Allah give us all guidance in uncovering the truths.
Overview
I am concerned but happy about the extra-huge investment rip-offs exposed in the US recently (specifically, the Madoff ponzi (get-rich-quick) scam). Is it happening again, or has it been happening worldwide for the last three decades? Put in the keyword ‘ponzi’ in any search engine on the net, and the result is endless of pages that describe this global phenomenon that is fast destroying financial and economic systems of nations, rich or poor alike. And the main culprit is the use of 'rate of interests', or Riba'.
As I read with a lot of anxiety about these investment scams, my concern, actually, is not about these sort of scams happening again (they definitely will). But about Muslims, worldwide, not understanding the basic principle or concept in finance (as well as, in investment). That basic principle or concept is the "Time Value of Money". That for every dollar or ringgit that you hold, it will appreciate or depreciate in value over time - present, future, or past. A word that best describes this concept is "Interest" - for Muslims its called "RIBA'" (absolutely HARAM in Islam, no doubt about that, however you put it). Most of the instruments/mechanisms or products in finance, banking, and investments fundamentally ride on this concept (otherwise they cannot and will not work).
Other words that describe this "Time Value of Money" (TVM) concept include "Rate of Returns", "Annual Rates of Return" or sometimes called "Annuities", Premiums, and "Annual Percentage Rates" or APR for short. All these terms will have 'compounding' rates or interests in their calculations. Another product that rides on this simple TVM concept is INSURANCE (for Life, Car, Homes, and everything its meant for).
So how will this affect us, as Muslims? Well, anything goes, from credit cards to savings accounts to car/housing loans, PLUS of course, our investments, if we have any. RIBA' is the destroyer of families, communities, societies, and nations (the poor gets poorer and the rich gets richer, fatter, and a whole lot more). Put time in to understand more about RIBA' & Finance.
Understanding Riba’
So what is Riba’, and where in Finance can you find Riba’? I wouldn't do justice in explaining such a strong word, the practice of which is strongly prohibited in our religion, within a couple of paragraphs. But simply put, Riba’ is ‘interest rate’, and you can find ‘interest rate’ in every page where one explains away the concepts and principles of Finance. In other words, the concepts and principles in Finance cannot and will not work without the use of ‘interest rates’ in their mathematical calculations. It’s not rocket science – just simple, straight-forward, basic mathematics, or you may call – ‘management science’. In other words, Finance cannot work without the concept of Riba’, embedded and intrapolated within it. Such a simple statement to make, but yet a life-changing influence it can have on a global scale – for all MUSLIMS.
In layman’s terms, Riba’ is about lending and borrowing money on interests, and about earning profits without sweating it out. Some people call it – ‘Easy Money’. I call it – ‘Dirty Money’. Bankers call it ‘annual rate of interests’ or ‘annual percentage rate’ or ‘annuities’ for short, Investors call it ‘dividends’ and also ‘returns’, Insurance people call it ‘premiums’, governments call it inflation, recession, deflation which all blatantly also refer to as ‘rate of inflation, recession, or deflation’. Why do Allah forbid Riba’, and in the strongest sense too? Because it deprives human being of equalness, fairness, and justified returns based on ones own effort and sweat. Above all, it is a form of oppression and enslavement. It is a product of the Zionists, who do not even like, much less, use this product of theirs in their own communities, but that they intent on misleading the world, to have the world use it and be heavily-dependent upon it, from day-to-day, man-on-the-street activities to national-level policies and initiatives.
A noted Muslim scholar, Sheikh Imran N. Hossein, has written a beautifully-narrated book, “The Prohibition of Riba in the Qur’an & Sunnah”. This literature, amongst his extensive collection and by far, is the most extensive piece of contemporary writing that closely and deeply touches this topic of Riba’ and its implications in the modern world. Instead of generalizing his noble work, I would rather quote specific texts from this book as direct references, so that the meanings do not get washed away through translations over time. Sheikh Imran succinctly described Riba’ as follows,
“When the poor are permanently poor, and the rich, permanently rich, that is oppression ….. the poor grow poorer and the rich, richer. Riba is the cause! ….. the elite ….. is constantly sucking the wealth of mankind and impoverishing the masses through riba ….. to utterly enslave all of mankind in a new sophisticated slavery …..
Riba is usury. Usury is commonly understood as the lending of money at illegally high rates of interest. But riba, or usury, in Islam is the lending of money on interest, regardless of the rate of interest! When money is lent on interest, then money by itself, independent of any labor or effort, or the assumption of any risk, increases over time. The increase is realized through the exploitation of labor, goods or property since Allah, The Most High, has unambiguously declared that nothing can be had without effort or labor (Qur’an:- 53:39). The exploitation of labor, goods or property is manifested through the decrease in their value, - something which Allah, The Most High, has specifically prohibited in several verses of the Qur’an (6:85, 11:85, 26:183, etc.)”
The above texts very clearly explain the use of ‘time value of money’ to decrease its (money) value through the concept of ‘interest’ - which is Riba’. Shockingly, this ‘time value of money’ concept is prevalently applied to all the principles in Finance, which most of them we are currently aware of, and are clearly practicing and participating in them (in banking and investments), directly or indirectly (our role in person, or through other people), knowingly or unknowingly (by our own choice, or through our own ignorance). We also know that we have a responsibility, as Muslims, to fight it and prevent its widespread use in oppressing the weak. So please, for further insights, read this book - very affordable and yet very far-reaching in its knowledge and insights on Riba’. There are other literatures on this topic. If you can find them, read them, too. Suffice to say, we now know a bit more what Riba’ is and its implications. Now let us explore this well-hidden concept of Riba’ that are in plain view and prevalently-used in every facet of our daily life – in Finance (i.e. the transacting, exchange and use of money – all of which we are highly-dependent on in our economic life).
Understanding Finance
What is Finance? Simply put, finance means that for every dollar you have, it will grow or shrink in value as time passes. One dollar today is usually worth less tomorrow. What you can buy with one dollar today will buy/give you less tomorrow. This dollar can apply to loans, price of products/services, stocks investment, insurance, and also, your salary, among others. There is a rate of increase or decrease in the value of that one dollar as time progresses. A dollar’s worth changes in time. It can be a constant or linear rate of change, or usually termed as ‘rate of increase’ or ’rate of decrease’. It can be a compounding or exponential rate of increase/decrease. And it can be also be an uneven rate of increase/decrease. Whatever that rate may be, the increase/decrease will be attached to time. By doing so, we are saying that there is constancy in growth/shrinkage of that one dollar – whether you work hard for it or not, or whether you have an influence in its growth/shrinkage or not! Because of this, those who are weak or poor, or those who do not have the power to influence the rate of increase/decrease of the dollar that they own, will always be marginalized – meaning to say, they will always be powerless to stop the decline in value of what they rightfully-earn or own. In other words, the poor will continue to be oppressed and enslaved by the powerful and the influential.
Analogy : Farmer and his cows
Let’s take an analogy of a farmer and his cows. Someone who buys, and hence owns, a herd of 100 cows worth $100,000 today may find that his herd is worth less than $100,000 the next month – all because the rate of inflation has increased (assuming all else remains constant/unchanged) in the last 30 days without him doing anything harmful to his cows but to feed them regularly. Is this fair to him? Definitely, not. But the world today says that the demand (value) for his cows has shrunk, so he does not deserve at least the minimum cost of owning that herd of cows. The selling value (price) of his cows is less that what he paid for (the principal amount). His sweat has worked against him. The returns or profits that are due to him based on his efforts (of one month’s cow feed) will not be fair, much less, justified. He may not even breakeven. This is what 'interests' have done to him and his assets - devaluing the things he rightfully-owns. He is powerless to stop this decline in value. He's worked hard, yet he's 'short-changed' - marginalised. He is poorer now than before.
Calculation of Riba’ in Finance
Calculation of Riba’ in Finance
So how is interest rates, or Riba’, calculated and used in Finance? Using a mere basic mathematical formula, interest rates in Finance is simply calculated and used, as follows;
(Future Value of Principal Amount, FV) = (Present Value of Principal Amount, PV) x (1 + i)^n
FV = PV x (1 + i)^n
FV = PV x (1 + i)^n
where, i is the rate of interest, and
n is timeframe (measured in years, month, days, etc.)
n is timeframe (measured in years, month, days, etc.)
If i was positive (increase or growth), there will be a premium in the Principal Amount
If i was negative (decrease or shrinkage), there will be a discount in the Principal Amount
If i was negative (decrease or shrinkage), there will be a discount in the Principal Amount
If this assumption holds true (i.e. n = 1, there is a value for timeframe), then we can attach a new value for every dollar that we own over time. Whether that value is positive (an increase in worth) or negative (a decrease in worth) depends on the rate of interest, i. And this rate of interest will be influenced by current and future demand and supply of that one dollar.
The opposite (inverse) function is also true, that the
Present Value of Principal Amount (PV) = Future Value of Principal Amount (PV) divide by (1 + i)^n
PV = FV / (1 + i)^n
or sometimes, written as (notice the n with a minus sign, while the multiplication sign is retained);
PV = FV x (1 + i)^(-n)
Example : Value of $100 today (PV) is worth $110 (FV) in one year’s time (n), if the annual interest rate (i) was 10%. The value of the $100 has depreciated (decreased) – what costs $100 today (PV), will cost $110 next year (FV) (an inflated rate of 10%).
FV = PV x (1 + i)^n
FV = $100 x (1 + 10%)^1
FV = $100 x (110%)1
FV = $100 x (1.1)1
FV = $110
PV = FV / (1 + i)^n
or sometimes, written as (notice the n with a minus sign, while the multiplication sign is retained);
PV = FV x (1 + i)^(-n)
Example : Value of $100 today (PV) is worth $110 (FV) in one year’s time (n), if the annual interest rate (i) was 10%. The value of the $100 has depreciated (decreased) – what costs $100 today (PV), will cost $110 next year (FV) (an inflated rate of 10%).
FV = PV x (1 + i)^n
FV = $100 x (1 + 10%)^1
FV = $100 x (110%)1
FV = $100 x (1.1)1
FV = $110
Example : Value of $110 tomorrow (FV) is worth $100 (PV) today (or one year ago, in time, n), if the annual interest rate (i) was 10%. The value of the $110 has depreciated (decreased) – what will cost $110 tomorrow (FV), costs $100 this year (PV) (due to an inflated rate of 10%).
PV = FV / (1 + i)^n
PV = $110 / (1 + 10%)^1
PV = $110 / (110%)1
PV = $110 / (1.1)1
PV = $100
PV = FV / (1 + i)^n
PV = $110 / (1 + 10%)^1
PV = $110 / (110%)1
PV = $110 / (1.1)1
PV = $100
Using these two formulae, we can clearly see the effects of ‘interest rates’ (i) on the $100. This amount can only be the same, today or tomorrow (hence, no decease or increase in value), if there was no ‘interests’ attached to it (i.e. when interest rate = zero). Hence, a Riba’–free $100, retains its value throughout time.
Analogy : Farmer and his cows
Analogy : Farmer and his cows
Using the above simple formula, let’s take a look at 2 scenarios based on our earlier analogy of the farmer and his cows; the farmer borrowing $100,000 to buy his 100 cows (i.e. taking an ‘interest-bearing’ loan); and the same farmer trying to sell his 100 cows later (during an inflation year). See how much poorer he will become, and how someone else profits from him while he suffers.
His 1-year Loan : His loan of $100,000 today (PV) is worth $110,000 (FV) in one year’s time (n), if the bank charged him an annual interest rate (i) of 10%. His loan value of $100,000 has increased to $110,000 in just one year (a $10,000 increase equals to the price of 10 cows) – the amount of $100,000 he borrowed today (PV), he will have to pay $110,000 next year (FV) (because the bank wants to make $10,000 from him, in just one year, without the bank doing anything at all other than to lend him the $100,000 – that is the bank’s mission). The farmer has yet to sell his cows, and hopefully make a decent profit (he has not sold his cows yet), but the bank has already profited (and $10,000 is a lot of money to a farmer).
1-year Loan = PV x (1 + i)^n
= $100,000 x (1 + 10%)^1
= $100,000 x (110%)1
= $100,000 x (1.1)
= $110,000
His 5-year loan : Now imagine his loan is for a 5-year period (which most trade loans are). In the above formula, when n=5, the rate of interest now becomes a compounded rate of interest (the ‘interests’ is now compounded five-fold). He now owes the bank $161,051 (an increase of more than 60% from his initial loan amount). This means that the bank will make a profit of $61,051 from the farmer in the next 5 years, without the bank doing anything for the farmer, other than to count the money it will receive every year from the farmer. And the bank always makes sure that the farmer pays off the ‘interests’ first ($61,051), before the principal amount ($100,000).
= $100,000 x (1 + 10%)^1
= $100,000 x (110%)1
= $100,000 x (1.1)
= $110,000
His 5-year loan : Now imagine his loan is for a 5-year period (which most trade loans are). In the above formula, when n=5, the rate of interest now becomes a compounded rate of interest (the ‘interests’ is now compounded five-fold). He now owes the bank $161,051 (an increase of more than 60% from his initial loan amount). This means that the bank will make a profit of $61,051 from the farmer in the next 5 years, without the bank doing anything for the farmer, other than to count the money it will receive every year from the farmer. And the bank always makes sure that the farmer pays off the ‘interests’ first ($61,051), before the principal amount ($100,000).
5-year loan = $100,000 x (1 + 10%)^5
= $100,000 x (1 + 10%)^1 x (1 + 10%)^1 x (1 + 10%)^1 x (1 + 10%)^1 x (1 + 10%)^1
= $100,000 x (110%)1 x (110%)1 x (110%)1 x (110%)1 x (110%)1
= $100,000 x (1.1) x (1.1) x (1.1) x (1.1) x (1.1)
= $110,000 x (1.61051)
= $161,051
= $100,000 x (1 + 10%)^1 x (1 + 10%)^1 x (1 + 10%)^1 x (1 + 10%)^1 x (1 + 10%)^1
= $100,000 x (110%)1 x (110%)1 x (110%)1 x (110%)1 x (110%)1
= $100,000 x (1.1) x (1.1) x (1.1) x (1.1) x (1.1)
= $110,000 x (1.61051)
= $161,051
His Selling Price : Now that the total cost of his cows has risen to $110,000 (if he took a 1-year loan), the farmer has no alternative but to sell it, at least, for $110,000 (if he’s kind enough not to put all other costs he has to bear in raising/breeding his cows). When he goes to the market (i.e. sell his cows to the wholesalers), the market puts a price on his cows (not him putting a price for his cows) – because the farmer is the supplier and the market is the demand. If the country he’s in is experiencing an inflation of, let’s say 5% (i.e. costs of goods are increasing, though not necessarily for the cows), then the wholesaler can justify a lower buying price (market demand) of the cows by 5% because overhead costs for the wholesaler has increased by 5%). So, the farmer can only sell his cow for $104,500 (a real loss of $5,500).
Selling Price = $110,000 x (1 + (-5%))1
= $110,000 x (1 - 5%)1
= $110,000 x (95%)1
= $110,000 x (0.95)1
= $104,500 (in one year’s time)
Therefore, the farmer’s LOSS = Selling Price LESS Loan amount
= $104,500 - $110,000
= - $5,500
Now imagine he took a 5-year loan, and all those years, and his country experienced inflation (for argument sake, at the same 5%). He will have to pay back the bank $161,051, so he has to sell his cows for, at least, this same amount. But since there has been a continuous streak of inflation for 5 years, the market can demand a discount (decrease) for the price of his 100 cows. He can only sell his cows for only $124,618, thus, incurring a real LOSS of $36,433.
= $110,000 x (1 - 5%)1
= $110,000 x (95%)1
= $110,000 x (0.95)1
= $104,500 (in one year’s time)
Therefore, the farmer’s LOSS = Selling Price LESS Loan amount
= $104,500 - $110,000
= - $5,500
Now imagine he took a 5-year loan, and all those years, and his country experienced inflation (for argument sake, at the same 5%). He will have to pay back the bank $161,051, so he has to sell his cows for, at least, this same amount. But since there has been a continuous streak of inflation for 5 years, the market can demand a discount (decrease) for the price of his 100 cows. He can only sell his cows for only $124,618, thus, incurring a real LOSS of $36,433.
Selling Price = $161,051 x (1 + (-5%))^5
= $161,051 x (1 - 5%)^5
= $161,051 x (1 - 5%)^1 x (1 - 5%)^1 x (1 - 5%)^1 x (1 - 5%)^1 x (1 - 5%)^1
= $161,051 x (95%)1 x (95%)1 x (95%)1 x (95%)1 x (95%)1
= $161,051 x (0.7737809375)1
= $124,618 (in 5 years’time)
Therefore, the farmer’s LOSS = Selling Price LESS Loan amount
= $124,618 - $161,051
= - $36,433
Of course, people would say this and that, like, why he didn’t sell them earlier instead of waiting for five years. Like everyone else, he was probably hoping that the economy might improve, year after year (because he already started losing from day 1 of his loan contract because of ‘interests’, or Riba’, on his loan). Imagine also, if he was to include all other costs of breeding the cows for 5 years, etc. His LOSSES would have increased two-fold, at least.
= $161,051 x (1 - 5%)^5
= $161,051 x (1 - 5%)^1 x (1 - 5%)^1 x (1 - 5%)^1 x (1 - 5%)^1 x (1 - 5%)^1
= $161,051 x (95%)1 x (95%)1 x (95%)1 x (95%)1 x (95%)1
= $161,051 x (0.7737809375)1
= $124,618 (in 5 years’time)
Therefore, the farmer’s LOSS = Selling Price LESS Loan amount
= $124,618 - $161,051
= - $36,433
Of course, people would say this and that, like, why he didn’t sell them earlier instead of waiting for five years. Like everyone else, he was probably hoping that the economy might improve, year after year (because he already started losing from day 1 of his loan contract because of ‘interests’, or Riba’, on his loan). Imagine also, if he was to include all other costs of breeding the cows for 5 years, etc. His LOSSES would have increased two-fold, at least.
So, what can we learn from this farmer and his miserable experience? Well, for one, banks charge ‘interests’, or Riba’, at our expense for its own selfish-goal of making profits out of nothing (no labor and effort, at all). Second, the Western-based ‘free-market’ economy means that whatever product/goods/services we’re trying to sell will always be at the mercy of influential people (like huge corporations, banks, etc., who make/create the demand/market) we don’t know, nor do they have any part in our effort, laboring to create that product/goods/services, so they can set the demand (price) and influence the supply (of what we’re trying to sell). Third, the value of the dollar that we hold (or products/goods/services that we sell) is always subjected to market demand, and that it fluctuates (increase or decrease in value) in time. And fourth, this fluctuation in the value of the dollar (or the products/goods/services) is the direct result of incorporating ‘interests’ or Riba’ in the transaction of that dollar. So, the poor gets poorer, the rich, richer. With Riba’, the weak will always be oppressed (by reducing the value of their products/goods/services) – and the bank facilitates this oppression, while at the same time, profiting from it.
And we’ve only just begun, talking about the simplest concept in Finance, above. There are hundreds more concepts in Finance that affect us in almost every facet of our daily lives – all waiting to be explored and their untruths (oppressionary methods), uncovered. Here’s a brief guide to how Riba’ is embedded in the principles and concepts of Finance.
Occurrences of Riba’ in Principles and Concepts of Finance
Occurrences of Riba’ in Principles and Concepts of Finance
So how deep and widespread is Riba’ used in Finance? In almost every sense of the word, it’s as deep as the world’s deepest ocean, and as widespread as the oceans of the world. As I’ve mentioned earlier, concepts and principles in Finance cannot and will not work without the use of interest rates. As much as the world cannot survive without its oceans, Finance cannot and will not work without using Riba’ in ALL of its methods and calculations.
Finance can be grouped into three major areas; financial management, banking, and investments (as in, stocks and bonds). The following mathematical calculations, shown below represent the major principles or basic concepts in each of the three main areas in Finance, named above (notice the number of instances in the use of i or r, the former representing ‘rate of interest’, and the latter representing ‘required rate of return’, which is another widely-used definition for ‘interest’);
A. Financial Management
1) Business Finance (pricing, costing, transaction costs, etc.)
2) Corporate Finance & Treasury (capital expenditures, loans/borrowings, etc.)
3) Financial Planning (linear growth rates, compounding rates, etc.)
4) Macro-Economic Indicators (inflation, recession, and nominal rates, etc.)
1) Business Finance (pricing, costing, transaction costs, etc.)
2) Corporate Finance & Treasury (capital expenditures, loans/borrowings, etc.)
3) Financial Planning (linear growth rates, compounding rates, etc.)
4) Macro-Economic Indicators (inflation, recession, and nominal rates, etc.)
B. Money & Capital Markets
1) Money Market (banking transaction, currency exchange, insurance, etc.)
2) Capital Market (valuation, asset-pricing, etc.)
3) Economic Indicators (Inflation, Recession, etc.)
1) Money Market (banking transaction, currency exchange, insurance, etc.)
2) Capital Market (valuation, asset-pricing, etc.)
3) Economic Indicators (Inflation, Recession, etc.)
C. Investments
1) Stock Portfolios (Shares, Options, Futures, Indexes, etc.)
2) Risk-Free Bonds and High-Return Mutual Funds
3) Currency & Commodity Trading
[ More notes on this Section coming ….. ]
Implications to Our Day-to-Day ‘Economic’ Life
1) Stock Portfolios (Shares, Options, Futures, Indexes, etc.)
2) Risk-Free Bonds and High-Return Mutual Funds
3) Currency & Commodity Trading
[ More notes on this Section coming ….. ]
Implications to Our Day-to-Day ‘Economic’ Life
Now comes the hard part. After learning the truths, do we want to change? Can we change? Since we now know that the principles, concepts and practices in Finance are fundamentally and totally-based on the concept of ‘interests’, and now we also know that ‘interests’ is specifically Riba’, and as Muslims, we accepted that Riba’ is ‘HARAM’, then we must do the next right thing – to fight Riba’ and cleanse it from our daily lives – to shield our families from ever dealing with it or getting close to it – and to help the weak from being oppressed by it by curbing its widespread use.
How do we go about instilling change for Muslims across the globe? A few strategies can be adopted to address two levels of change in each Muslim nation; at the national level, and at the individual level.
At the national level, governments must;
1) Establish and sincerely adopt an alternative mechanism to replace ‘Paper Money’ because this current form of economic transaction is the easiest medium where Riba’ can and have flourished, and where Riba’ can and have remained hidden from unsuspecting and unenquiring minds. If we need some ideas to start, look into history and see what has worked before during the glorious Islamic civilizations of the past. I’m sure there’s something that must have worked right sometime ago – otherwise our great civilizations would not have been world-conquering in those days. A few years back, someone mentioned the use of the ‘gold dinar’ in Islamic financing - not proposed as an alternative to ‘paper money’ in transacting goods and services, but to just complement the banking system. Maybe, this can be a start.
2) As the alternative form of ‘Money’ is being established, governments must expediently form, in parallel, a new ‘baitulmal’-type of platform or mechanism (as an alternative to the current Riba’-ridden banking systems), one that is highly-regulated according to Syariah Laws (and only by Syariah Laws, alone – which ultimately may impinge on sensitive issues in our Legal framework), to transact this new alternative ‘Money’, in an environment that is TOTALLY-FREE of ‘interests’ and ‘interest-bearing’ activities.
A smooth and subtle transition is critical to stabilize a foreseen chaotic change, while at the same time to instill the confidence of the masses and attract them to this new alternative ‘Money’ and mechanism.
3) When an alternative form of ‘Money’ and a platform for transacting goods and services with this alternative ‘Money’ are established, Islamic nations must strive to look inwards to other Islamic nations, first, before other non-Western nations (effectively, striking-out Western nations as our major trading partners), for economic development, multi-lateral trades, and Syariah-compliant investment opportunities. There are almost 2 billion Muslims on this planet, plus another 3 billion non-Westerners who are desperately trying to get out and break free from the economic clutches and control of the Western world. I’m sure there’s enough room for growth for every Muslim company on Earth if we were to just look inwards, towards our brethren-nations, and along the way, help out other impoverished non-Western nations, too.
At the individual level, Muslim individuals must;
1) Be made AWARE of, either their unsuspecting or transparent use of or dealings in ‘interests’, and their direct or indirect participation in or support of ‘interest-bearing’ activities, through;
- a nationwide-integrated program, highly-affordable and easily-accessible for the Muslim community, to address ‘Riba’ in Finance’ - comprehensively-developed to disseminate this knowledge and facts to as many Muslims as possible.
- the respective agencies overseeing Syariah laws and compliance – seen as leading (if not, being at least fully-supportive or highly-participative in) this program to gain public confidence and to easily attract the Muslim masses. Expedience is key.
2) Be encouraged to be SELF-CRITICAL of how they earn or sustain their living, and how they spend, save, or invest in what they have earned. They should regularly ponder on these values (and criticize their very acts), and share these values with others around them; that
- What we earn must be free from Riba’ (calculation of salaries/wages must be free from any form of Riba’ computation).
- Where we work must not deal with Riba’ (our company’s businesses must not engage in ‘interests’ or support ‘interest-bearing’ activities).
- Where we keep our money must not be a place for Riba’ to flourish (banks that we deal in must not have products/services/mechanisms that offer or support ‘interests’ or engage in ‘interest-bearing’ activities – but banks are obviously not able to function without their ‘interest-bearing’ activities).
- What businesses we engage in must not practice the concept or support the use of Riba’ (borrowings, spending, investments for your businesses must be interest-free, and free from ‘interest-bearing’ activities).
- How we function as an individual, a family or a community member leading our personal, family and community lives must be free of ‘interests’ (‘interest-free’ investments, savings, borrowings and spending), and must not support ‘interest-bearing’ activities (vis-à-vis, our economic transactions – we pay/buy in cash or cash alternatives, and borrow/repay only on Principal amounts, and none other).
Analyzed closely, the above 5 statements can be categorized into just two main statements; how we earn or sustain our living; and how we spend, save or invest in what we have earned. Let’s look closely at these two main statements in relation to ‘interests’ (how much do we deal in?) and ‘interest-bearing activities’ (how much do we support?);
A. How we earn or sustain our living? (How ‘clean’ are our earnings and borrowings?)
1) Where we work? What we do in work? How are we paid in salary/wages?
2) What is our business? What products/services do we offer? How much/high do we charge?
3) How do you borrow to sustain your living? How do you borrow to expand your business?
B. How we spend, save, or invest in what we have earned? (How ‘clean’ do we make use of our earnings?)
1) What do we spend our earnings on? Where do we spend our earnings?
2) Where do we keep our saved earnings (savings)? What savings products/services/plans do we buy? What savings mechanisms/platform do we engage in?
3) Where do we invest our earnings? What type of investment vehicle do we invest in?
4) How do you lend your money?
1) Where we work? What we do in work? How are we paid in salary/wages?
2) What is our business? What products/services do we offer? How much/high do we charge?
3) How do you borrow to sustain your living? How do you borrow to expand your business?
B. How we spend, save, or invest in what we have earned? (How ‘clean’ do we make use of our earnings?)
1) What do we spend our earnings on? Where do we spend our earnings?
2) Where do we keep our saved earnings (savings)? What savings products/services/plans do we buy? What savings mechanisms/platform do we engage in?
3) Where do we invest our earnings? What type of investment vehicle do we invest in?
4) How do you lend your money?
For Statement A, the moment you work for a company or conduct a business that openly or discreetly deals in ‘interests’ or support ‘interest-bearing activities’, your earnings will not be free of such ‘interests’ or free of supporting such ‘interest-bearing activities’. So, your income is HARAM because your earnings is a direct or indirect result of the company’s or your business’ dealing in ‘interests’, or supporting ‘interest-bearing activities’. The following advise can help cleanse your earnings and borrowings;
(i) Don’t work for companies that openly or discreetly deal in ‘interests’ or support in ‘interest-bearing’ activities. Our salary/wages comes from revenues which are earned through the Company’s business(es) LESS the costs of its operations (of generating that revenue). Ensure that these points of influence (revenues and costs) are free from ‘interests’ (business revenues) and do not support ‘interest-bearing’ activities (cost of operations). Since banks and almost all of financial institutions are the biggest culprits in the widespread use of ‘interests’, find other sectors of the industry to work in. Major corporations (multinationals or big local corporations) also deal a lot in ‘interests’ (i.e. through their corporate financing/borrowing and banking activities) or ‘interest-bearing’ activities (i.e. through their investment activities and financial management functions). Available alternatives to work in include the education and some service sectors, and SMEs and ‘non-capital-intensive’ companies.
a. Can you afford to have a reduction in your pay so you could work in an ‘interest-free’ environment/workplace?
b. Do you sincerely seek for an ‘interest-free’ environment to work in, so you can have a higher chance of shielding your family from the ravages that only ‘interests’ can bring?
c. Are revenues, earned and received, clean of ‘interests’, and not a result of ‘interest-bearing’ activities?
d. Do company’s operations support ‘interest-bearing’ activities (e.g. financial transactions that support ‘interests’)?
e. Are the company’s products and service offerings riding on the fundamentals of ‘interests’ (like banking, insurance and investment products)
b. Do you sincerely seek for an ‘interest-free’ environment to work in, so you can have a higher chance of shielding your family from the ravages that only ‘interests’ can bring?
c. Are revenues, earned and received, clean of ‘interests’, and not a result of ‘interest-bearing’ activities?
d. Do company’s operations support ‘interest-bearing’ activities (e.g. financial transactions that support ‘interests’)?
e. Are the company’s products and service offerings riding on the fundamentals of ‘interests’ (like banking, insurance and investment products)
(ii) Don’t engage in business(es) that deals in ‘interest-bearing’ products/services. Banking, insurance and investment products are the usual most ‘interest-bearing’ products.
a. Can you ascertain that the products you sell or services you offer are not ‘interests-bearing’, do not deal with the computation of interests, and are not risk-free?
b. Can you vouch/guarantee that the prices you charge are not exhorbitantly-high? (minimal costs of transactions of between 0%-3% are allowed in Islam).
a. Can you ascertain that the products you sell or services you offer are not ‘interests-bearing’, do not deal with the computation of interests, and are not risk-free?
b. Can you vouch/guarantee that the prices you charge are not exhorbitantly-high? (minimal costs of transactions of between 0%-3% are allowed in Islam).
(iii) Don’t borrow to sustain your living standards or to expand your business(es) (bank loans is the biggest source of ‘interests’ - banks operate on and profit from loan interests, without which banks cannot exist). If you have to borrow, the ‘akad’ (contract) must be free from ‘interests’ clause(s) (which practically eliminates all bank loans). Here are some philosophical statements you might want to consider;
a. Can you live free of home loans, car loans, and other unnecessary personal household loans?
b. Can you reduce your standards of living, or change/adjust your lifestyles to suit a lower living standard, or both?
c. Can your business operate, expand or sustain without incurring borrowings?
d. Do you sincerely want to live and be free of ‘interests’ by doing all of the above?
a. Can you live free of home loans, car loans, and other unnecessary personal household loans?
b. Can you reduce your standards of living, or change/adjust your lifestyles to suit a lower living standard, or both?
c. Can your business operate, expand or sustain without incurring borrowings?
d. Do you sincerely want to live and be free of ‘interests’ by doing all of the above?
For Statement B, the moment you spend, save, or invest in places that openly or discreetly offer/deal in ‘interests’ or that support ‘interest-bearing activities’, your earnings that you spent, saved or invested in will not be free of such ‘interests’ or free of supporting such ‘interest-bearing activities’. So, your earnings that you spent, saved or invested in is HARAM because you directly or indirectly deal in ‘interests’, or support ‘interest-bearing activities’. The following advise can help cleanse where your money goes to;
(i) Don’t use or spend using credit cards to sustain your living standards – they are banking products that fundamentally ride on ‘interests’ – without which (‘interests’), banks cannot provide ‘CREDIT’!
(ii) Don’t keep your money in banks. As mentioned earlier, since banks and almost all of the financial institutions are the biggest culprits in the widespread use of ‘interests’, find other alternatives (e.g. Islamic Baitulmal) to place your savings/earnings.
(iii) Don’t invest in ‘interest-bearing’ investment products.
(iv) Don’t lend your money with ‘interests’. Minimal transaction costs in managing your lending are allowed in Islam but, generally, it should not be more than 2%.
3) Make a conscious effort to reduce his/her exposure to Western media and marketing ploy which have successfully deceived Muslims into believing, and hence, unquestionably-adopting the ‘Riba’-ridden’ Western models of free-market economy and democracy. Muslim individuals must continuously strive to shield themselves and their families from all forms of entertainment attractions and ‘pop’ cultures, and from exposure to all forms of advertising, promotional campaigns and publicity stunts (these are the mediums that have successfully promoted and continue to promote Riba’ openly and discreetly).
….. to be continued
A dejected-looking Bernard L. Madoff - the mastermind behind the biggest scam in the history of the stock market (anywhere in the world) - indicted in the US fed court for swindling US$50Bil in investment funds, last Thursday, 11Dec08.
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