1. 1 The Fiqh of Islamic Financing Presented by Imam Faisal Ahmad, with thanks to the Islamic American University

2. 2 Riba The only sin in the Quran in which Allah (SWT) declares war against those who commit it. (يا أيها الذين امنوا اتقوا الله وذروا ما بقي من الربا إن كنتم مؤمنين،فإن لم تفعلوا فاذنوا بحربٍ من الله ورسوله،وإن تبتم فلكم رؤوس أموالكم لا تظلمون ولا تُظلمون)

3. 3 Riba is Haram Allah (SWT) and His Prophet (PBUH) curse those who are involved in usurious transaction. (لعن الله اكل الربا ومؤكله وكاتبه وشاهديه) (لعن رسول الله صلى الله عليه وسلم اكل الربا ومؤكله وكاتبه وشاهديه،وقال:هم سواء) Taking Riba and giving it to others are the same !even witnesses and the one who documents the usury are cursed too !

4. 4 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: اجْتَنِبُوا السَّبْعَ الْمُوبِقَاتِ قَالُوا يَا رَسُولَ اللَّهِ وَمَا هُنَّ قَال الشِّرْكُ بِاللَّهِ وَالسِّحْرُ وَقَتْلُ النَّفْسِ الَّتِي حَرَّمَ اللَّهُ إِلا بِالْحَقِّ وَأَكْلُ الرِّبَا وَأَكْلُ مَالِ الْيَتِيمِ وَالتَّوَلِّي يَوْمَ الزَّحْفِ وَقَذْفُ الْمُحْصَنَاتِ الْمُؤْمِنَاتِ الْغَافِلات

5. 5 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.

6. 6 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.

7. 7 Transactions at a glance 1-Bank Loans 2-Late Fees or Charges 3-Credit Cards 4-Debit Card 5-Saving Account

8. 8 6-Checking Account 7-Financing 8-“lease to purchase” option. 9-Investing In (401)K Plan

9. 9 10-Buying a house via conventional mortgage and according to Shariah 11-University Late registration fees 12-Status of money from loans after repentance.

10. 10 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.

11. 11 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 أموالٍ محدودةٍ في معاملاتٍ محدودةٍ

12. 12 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.

13. 13 3- Usurious Transactions عن أبي سعيد الخدري قال قال رسول الله صلى الله عليه وسلم الذهب بالذهب مثل بمثل يد بيد والبر بالبر مثل بمثل يد بيد والفضة بالفضة مثل بمثل يد بيد والتمر بالتمر مثل بمثل يد بيد والشعير بالشعير مثل بمثل يد بيد والملح بالملح مثل بمثل يد بيد فمن زاد واستزاد فقد أربى الآخذ والمعطي سواء

14. 14 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

15. 15 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 التبرعات ) where 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.

16. 16 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:

17. 17 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).

18. 18 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.

19. 19 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 الله صلى الله عليه و سلم عن بيع الكالئ بالكالئ

20. 20 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.

21. 21 If any of the aforementioned conditions are not completely fulfilled, then the transaction is an interest-bearing contract, and it’s definitely prohibited.

22. 22 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

23. 23 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 ( قبض ) Riba leaves the door open to the unknown (gharar). Usury and injustice are synonyms !!

24. 24 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 الله و ذروا ما بقي من الربا إن كنتم مؤمنين“ ”لعن رسول الله صلى الله عليه وسلم اكل الربا، وموكله ، وكاتبه،وشاهديه،وقال هم سواء“ Borrowing to invest or to purchase does not change the rule.

25. 25 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 interest- bearing activity.

26. 26 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.

27. 27 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).

28. 28 Payment plan (on a monthly basis). c- The above conditions are usurious. Agreeing to this is prohibited.

29. 29 d- Scholars differentiate between two kinds of prohibited matters: حرام لذاته prohibited by itself, like paying riba for others, taking it from others, adultery, drinking alcohol, etc. حرام لغيره prohibited because of its consequences, like agreeing to pay late fees (without paying it yet).

30. 30 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.

31. 31 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.

32. 32 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.

33. 33 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.

34. 34 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)

35. 35 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.

36. 36 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.

37. 37 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.

38. 38 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.

39. 39 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.

40. 40 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.

41. 41 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.“

42. 42 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.

43. 43 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.

44. 44 e- Buying through a (0%APR) finance is permissible. It means that the client is borrowing a free of interest loan.

45. 45 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.

46. 46 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)

47. 47 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.

48. 48 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.

49. 49 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.

50. 50 In a different, independent, and non-stipulated contract, the bank can sell the house to the client, نهى رسول الله صلى الله 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.”

51. 51 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.

52. 52 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.

53. 53 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.

54. 54 g-Necessity (Daroora) in Shariah means something that must be done in order to avoid harm to life or limb.

55. 55 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.

56. 56 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.

57. 57 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.

58. 58 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.

59. 59 فمن جاءه موعظة من ربه فانتهى فله ماسلف و أمره إلى الله 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.”

60. 60 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).

61. 61 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.

62. 62 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.

63. 63 20- Working in a company that has some Riba transactions for non- Muslim customers. The core business should be permissible. A Muslim should not be involved in any usuries transaction.

64. 64 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.

65. 65 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 six- month grace period, and during any deferment period. Subsidized loans are awarded based on financial need.

66. 66 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.

67. 67 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

68. 68 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.

69. 69 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.