Almost all contemporary writings in Islamic Law and/or Islamic finance proclaim that Islamic Law (Shar?#a) forbids interest. This statement is paradoxical in light of the actual practices of Islamic financial providers over the past three decades. In fact, the bulk of Islamic financial practices formally base rates of return or costs of capital on a benchmark interest rate such as LIBOR, and would easily be classified by any MBA student as interest-based debt-finance. Nevertheless, jurists on the payrolls of Islamic financial providers continue to proclaim all forms of interest as rib?, which is subject to the severest Qur"anic prohibition. As quotations later in this article will illustrate, this dual role of jurists (condemning conventional interest-based financing, while supporting and personally profiting from its “Islamic” twin) is supported through excessively formalistic interpretation of the letter of the Law.
Minority opinions permitting modern forms of interest have surfaced from time to time, and they were occasionally championed by holders of highly respectable (though, often politically appointed) religious posts. Perhaps the oldest such pronouncement was made by Ebusuud Efendi, the Mufti of Istanbul between 1545 and 1574 C.E., and holder of the title ”eyhülislam towards the end of his tenure. Ebusuud defended the act of interest-taking, especially by awq?f (pious foundations), as a practical matter of necessity.1 As expected, this minority opinion, while sanctioned by the Ottoman Sultan Suleyman, was rejected by the majority of Muslim scholars around the Arab world, who continued to favor interest-free lending and traditional partnership forms of finance. Consequently, European modes of banking only became commonly practiced in the Islamic world in the eighteenth century. Even then, this widespread adoption of “western” banking practices appears to have been driven by external forces.
Most recently, Sheikh-al-Azhar Muhammad Sayyid Tantawi re-iterated a fatw? (issued opinion in response to a question regarding Islamic Law) that he had issued in 1989, and published in the semi-official newspaper Al-Ahram, when he was the Mufti of Egypt.3 This most recent fatw?, carrying the support of the Azhar Islamic Research Institute (IRI) (Majma# al-Bu??th al-Islamiyyah) as well as Tantawi’s own, differed little from its predecessors in terms of substance. Indeed, parts of its text seem to be copied verbatim from a book on banking operations published by Tantawi well before the elicitation of this recent fatw? by a member of the IRI, who is also chairman of the board of directors of a bank.
One interesting aspect of the two opinions of Tantawi and the IRI is that they deal exclusively with the relationship between bank depositors and the bank, without addressing the nature of banks’ assets.4 The essence of the fatw? is that bank depositors should be viewed as passive investors, and banks should be viewed as their investment agents. The problem of interest on bank deposits is thus reduced to one of permissibility of pre-specifying the “profits” to which depositors are entitled as a percentage of the capital, instead of specification as a percentage of actually realized profits. This constitutes a violation of the classical rules of the silent partnership contracts known as mu??raba or qir?? (and analogous to the Medieval European commenda contract and the Jewish heter isqa).
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Interest and the Paradox of Contemporary Islamic Law and Finance
