interest and islam

[sibghat]

AOA Everyone,
Here are the some words that i got after a little search I am also in same boat guys

<b>"</b>It must be understood that when we claim that Islam has a satisfactory solution
for every problem emerging in any situation in all times to come, we do not mean
that the Holy Quran and Sunnah of the Holy Prophet or the rulings of Islamic
scholars provide a specific answer to each and every minute detail of our socioeconomic
life. What we mean is that the Holy Quran and the Holy Sunnah of
the Prophet have laid down the broad principles in the light of which the scholars
of every time have deduced specific answers to the new situations arising in their
age. Therefore, in order to reach a definite answer about a new situation the
scholars of Shariah have to play a very important role. They have to analyze
every question in light of the principles laid down by the Holy Quran and
Sunnah as well as in the light of the standards set by earlier jurists enumerated in
the books of Islamic jurisprudence. This exercise is called Istinbat or Ijtihad...
[T]he ongoing process of Istinbat keeps injecting new ideas, concepts and rulings
into the heritage of Islamic jurisprudence... <b>"</b>

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The official fatw#257; (in Arabic) is reproduced in the Appendix, since the author has received
many requests by email from readers who wished to read the Arabic original and study its
specific wording. A translation of its full text follows

<i>Office of the Grand Imam, Rector of Al-Azhar</i>

<b>Investing funds with banks that pre-specify profits</b>

Dr. Hasan Abbas Zaki, Chairman of the Board of Directors of the Arab Banking
Corporation, sent a letter dated 22/10/2002 to H.E. the Grand Imam Dr.
Muhammad Sayyid Tantawi, Rector of Al-Azhar. Its text follows

"H.E. Dr. Muhammad Sayyid Tantawi,
Rector of Al-Azhar
Greetings and prayers for Peace, Mercy, and blessings of Allah
Customers of the International Arab Banking Corporation forward their funds
and savings to the Bank to use and invest them in its permissible dealings, in
exchange for profit distributions that are pre-determined, and the distribution
times are likewise agreed-upon with the customer. We respectfully ask you for the
[Islamic] legal status of this dealing.
[Signature]

He has also attached a sample documentation of the dealing between an investor
and the bank. The sample reads as follows
--------------------------------------------
The International Arab Banking Corp.
Bank
Date / / 2000 A.D.
Mr/________________ Account number ____________
Kind Greetings
This is to inform you that your account with us, in the amount of L.E.
100,000 (only one hundred thousand Egyptian Pounds) has been
renewed. For the period 1/1/2002 until 31/12/2002 A.D.
Rate of return 10% resulting in a return of L.E. 10,000
Total of deposit + return on distribution date L.E.110,000
___________
New amount, including return as of 31/12/2002 L.E.110,000

------------------------------------------
His Excellency, the Grand Imam, has forwarded the letter and its attachment for
consideration by the Council of the Islamic Research Institute in its subsequent
session.
The Council met on Thursday, 25 Sha#ban, 1423 A.H., corresponding to 31
October, 2002 A.D., at which time the above mentioned subject was presented.
After the members’ discussions and analysis, the Council determined that
investing funds in banks that pre-specify profits is permissible under Islamic Law,
and there is no harm therein.
Due to the special importance of this topic for the public, who wish to know the
Islamic Legal ruling regarding investing their funds with banks that pre-specify
profits (as shown by their numerous questions in this matter), the Secretariat
General of the Islamic Research Institute decided to prepare an official fatw#257;,
supported by the Islamic Legal proofs and a summary of the Institute members’
statements. This should give the public a clear understanding of the issue, thus
giving them confidence in the opinion.
The General Secretariat presented the full fatw#257; text to the Islamic Research
Institute Council during its session on Thursday, 23 Ramadan 1423,
corresponding to 28 November 2002 A.D. Following the reading of the fatw#257;,
and noting members’ comments on its text, they approved it.

<b>This is the text of the fatw#257;</b>

Those who deal with the International Arab Banking Corporation Bank – or any
other bank – forward their funds and savings to the bank as an agent who invests
the funds on their behalf in its permissible dealings, in exchange for a profit
distribution that is pre-determined, and at distribution times that are mutually
agreed-upon …
This dealing, in this form, is permissible, without any doubt of impermissibility.
This follows from the fact that no Canonical Text in the Book of Allah or the
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Prophetic Sunnah forbids this type of transaction within which profits or returns
are pre-specified, as long as the transaction is concluded with mutual consent.
Allah, transcendent is He, said "Oh people of faith, do not devour your
properties among yourselves unjustly, the exception being trade conducted by
mutual consent…" (Al-Nis#257;"29)
The verse means Oh people with true faith, it is not permissible for you, and
unseemly, that any of you devour the wealth of another in impermissible ways
(e.g. theft, usurpation, or usury, and other forbidden means). In contrast, you are
permitted to exchange benefits through dealings conducted by mutual consent,
provided that no forbidden transaction is thus made permissible or vice versa.
This applies regardless of whether the mutual consent is established verbally, in
written form, or in any other form that indicates mutual agreement and
acceptance.
There is no doubt that mutual agreement on pre-specified profits is Legally and
logically permissible, so that each party will know his rights.
It is well known that banks only pre-specify profits or returns based on precise
studies of international and domestic markets, and economic conditions in the
society. In addition, returns are customized for each specific transaction type,
given its average profitability.
Moreover, it is well known that pre-specified profits vary from time period to
another. For instance, investment certificates initially specified a return of 4%,
which increased subsequently to more than 15%, now returning to near 10%.
The parties that specify those changing rates of returns are required to obey the
regulations issued by the relevant government agencies.
This pre-specification of profits is beneficial, especially in this age, when
deviations from truth and fair dealing have become rampant. Thus, prespecification
of profits provides benefits both to the providers of funds, as well as
to the banks that invest those funds.
It is beneficial to the provider of funds since it allows him to know his rights
without any uncertainty. Thus, he may arrange the affairs of his life accordingly.
It is also beneficial to those who manage those banks, since the pre-specification
of profits gives them the incentive for working hard, since they keep all excess
profits above what they promised the provider of funds. This excess profit
compensation is justified by their hard work.
It may be said that banks may lose, thus wondering how they can pre-specify
profits for the investors.
In reply, we say that if banks lose on one transaction, they win on many others,
thus profits can cover losses.
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In addition, if losses are indeed incurred, the dispute will have to be resolved in
court.
In summary, pre-specification of profits to those who forward their funds to banks
and similar institutions through an investment agency is Legally permissible.
There is no doubt regarding the Islamic Legality of this transaction, since it
belongs to the general area judged according to benefits, i.e. wherein there are no
explicit Texts. In addition, this type of transaction does not belong to the areas of
creed and ritual acts of worship, wherein changes and other innovations are not
permitted.
Based on the preceding, investing funds with banks that pre-specify profits or
returns is Islamically Legal, and there is no harm therein, and Allah knows best,
[signed]
Rector of Al-Azhar
Dr. Muhammad Sayyid Tantawi
27 Ramadan 1423 A.H.
2 December 2002 A.D.
----------------------------------------
The second and penultimate paragraphs of the fatw#257; hinted to the common objection to
fixing profits in the Islamic silent partnership contract (mu#8729;#257;raba). As we shall see below,
jurists often claim that there is a consensus that the principal's profit share must be
specified as a percentage of total profits -- rather than a fixed percentage of the capital.
The text of the fatw#257; hints at the view that this opinion was only an artifact of the
historical thought of Islamic jurists who developed the principle, and does not rely on any
direct injunction in Canonical Islamic Texts.
Elsewhere, Tantawi elaborated on the fatw#257;'s justification of fixing the profit share as a
percentage of the partnership's capital on moral hazard considerations 18
Non-fixity of profits [as a percentage of capital] in this age of corruption,
dishonesty and greed would put the principal under the mercy of the agent
investing the funds, be it a bank or otherwise.
In his book, Tantawi also cited similar opinions by highly respected earlier jurists,
including Abdul-Wahhab Khallaf19, Ali Al-Khafif20, and others.21 Most notable among
those quotations are the following
17 In other words regardless of whether or not profits are pre-specified, such cases of realized losses will
have to be settled in court.

When one gives his money to another for investment and payment of a known
profit, this does not constitute the definitively forbidden rib#257;, regardless of the prespecified
profit rate. This follows from the fact that disagreeing with the juristic
rule that forbids pre-specification of profits does not constitute the clear type of
rib#257; which ruins households. This type of transaction is beneficial both to the
investor and the entrepreneur. In contrast, rib#257; harms one for no fault other than
being in need, and benefits another for no reason except greed and hardness of
heart. The two types of dealings cannot possibly have the same legal status
(Èukm).
The juristic condition for validity [of mu#8729;#257;raba] that profits are not pre-specified is
a condition without proof (dal#299;l). Just as profits may be shared between the two
parties, the profits of one party may be pre-specified… Such a condition may
disagree with jurists’ opinions, but it does not contradict any Canonical Text in
the Qur’#257;n and Sunnah.
The only objection for this dealing is the condition of validity of mu#8729;#257;raba that
profits must be specified as percentage shares, rather than specified amounts or
percentages of capital. I reply to this objection as follows
• First This condition has no proof (dal#299;l) from the Qur’#257;n and Sunnah.
Silent partnerships follow the conditions stipulated by the partners. We
now live in a time of great dishonesty, and if we do not specify a fixed profit
for the investor, his partner will devour his wealth.
• Second If the mu#8729;#257;raba is deemed defective due to violation of one of its
conditions, the entrepreneur thus becomes a hired worker, and what he
takes is considered wages. Let that be as it may, for there is no difference in
calling it a mud#257;raba or an ‘ij#257;ra It is a valid transaction that benefits the
investor who cannot directly invest his funds, and benefits the entrepreneur
who gets capital with which to work. Thus, it is a transaction that benefits
both parties, without harming either party or anyone else. Forbidding this
beneficial transaction would result in harm, and the Prophet (P) forbade
that by saying “No harm is allowed”.
We now note again that this fatwa is focused on the liabilities side of banking, and even
then addresses the issue from the point of view of depositors. Indeed Tantawi (2001)
argued that the depositor/bank relationship should neither be viewed as one of
depositor/depositary nor one of lender/borrower. Either characterization of the
relationship, he admits, would render any interest payment a form of the forbidden rib#257;.
In contrast, he argued, savers take their funds to banks to invest on their behalf.
Therefore, he argued, the relationship is one of principal/agent in an investment agency,
and the juristic problem discussed above is only regarding the permissibility of fixing
profits as a percentage of capital in such investment agency. As we shall see shortly, the
rebuttal, representing the views of most jurists athe world, insists that the
relationship is initially one of deposit. Once the depositary uses the funds deposited
therein, classical jurisprudence suggests that the depositary has thus violated the simple
safekeeping duties of a fiduciary deposit, and must thus guarantee the funds for the
depositor. The deposit contract is one of trust rather than guaranty, i.e. the depositary
only guarantees funds against its own negligence and transgression, not unconditionally.
Therefore, the classical juristic argument concludes, the contract can no longer be viewed
as a deposit, and must be viewed as a loan, the latter being a contract of guaranty.
Indeed, Tantawi (2001) spends much of the book arguing that deposits at banks do not fit
the classical jurisprudence definition of “deposits” (wad#299;#ah), and rejects their
characterization as loans.
5. Rebuttal by the Islamic Fiqh Institute in Qatar (January 2003)
In the conclusions of the Fourteenth Session of Majlis Majma# Al-Fiqh Al- Islami in D#363;Èa,
Qatar, January 11-16, 2003, the Azhar IRI’s characterization of dealings with
conventional banks as a legitimate investment vehicle was rejected. The following lengthy
quotation from the official conclusions of the meeting summarizes the contemporary
overwhelming-majority view on conventional banking among jurists
A. Conventional Bank functions
Banking laws forbid banks from dealing through profit and loss-sharing
investment. Banks receive loans from the public in the form of deposits, and
restrict their activities – according to lawyers and economists – to lending and
borrowing with interest, thus creating credit through lending deposited funds
with interest.
B. Conventional Bank relationship with depositors
The religious-law (shar#i) and secular-law characterizations of the relationship
between depositors and banks is one of loans, not agency. This is how general
and banking laws characterize the relationship. In contrast, investment agency is
a contract according to which an agent invests funds on behalf of a principal, in
exchange for a fixed wage or a share in profits. In this regard, there is a consensus
[of religious scholars] that the principal owns the invested funds, and is therefore
entitled to the profits of investment and liable for its losses, while the agent is
entitled to a fixed wage if the agency stipulated that. Consequently, conventional
banks are not investment-agents for depositors. Banks receive funds from
depositors and use them, thus guaranteeing said funds and rendering the contract
a loan. In this regard, loans must be repaid at face value, with no stipulated
increase.
C. Conventional Bank interest is a form of forbidden rib#257;
25 Qar#257;r#257;t wa Tawßiy#257;t Al-Dawrah Al-Rabi#at #Ashr li-Majlis Al-Fiqh Al- Islami (Decisions and conclusions of the
fourteenth session of the Islamic Jurisprudence Council), Decision #133 (7/14), pp. 20-24.
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Banks’ interest on deposits is a form of rib#257; that is forbidden in the Qur"an and
Sunna, as previous decisions and fat#257;w#257; have concurred since the second meeting
of the Islamic Research Institute in Cairo, Muharram 1385 A.H., May 1965
A.D., attended by eighty-five of the greatest Muslim scholars and representatives
of thirty-five Islamic countries. The first decision of that conference stated
“Interest on any type of loan is forbidden rib#257;”. The same decision was affirmed
by later decisions of numerous conferences, including
... [List of conferences and Institute opinions prohibiting bank interest]
D. Pre-specification of investment profits in amount, or as a percentage of
the invested capital
It is universally accepted that interest-bearing loans differ from legal silent
partnership (mu#8729;#257;raba). In loans, the borrower is entitled to profits and bears all
losses. In contrast, mu#8729;#257;raba is a partnership in profits, and the principal bears
financial losses if they occur, as per the Prophet's (P) saying “Al-khar#257;ju bi-l-#8729;am#257;n)
profits are justified for the one bearing liability for losses” (narrated by Ahmad
and the authors of Sunan, with a valid chain of narration)...
Thus, jurists of all schools have reached a consensus over the centuries that prespecification
of investment profits in any form of partnership is not allowed, be it
pre-specified in amount, or as a percentage of the capital. This ruling is based on
the view that such a pre-specification guarantees the principal capital, thus
violating the essence of partnerships (silent or otherwise), which is sharing in
profits and losses. This consensus is well established, and no dissent has been
reported. In this regard, ibn Qudamah wrote in Al-Mughni (vol.3, p.34) “All
scholars whose opinions were preserved are in consensus that silent partnership
(qir#257;#8729; or mu#8729;#257;raba) is invalidated if one or both partners stipulate a known amount
of money as profit”. In this regard, consensus of religious scholars is a legal proof
on its own.
The council urges Muslims, as it declares this unanimous decision, to earn money
only through permissible means, and to avoid forbidden sources of income in
obedience to Allah (S) and his Messenger (P).
This opinion contains four main arguments against the correctness and the relevance of
the IRI fatw#257;, and it would be helpful at this point to summarize those arguments
1. The fatw#257; refers to banks with permissible investments, but banks are forbidden
from investing in any instruments other than interest-bearing loans and financial
instruments.
2. Characterizing the depositor/bank relationship as one of investment agency is
incorrect. The correct classical characterization is one of lender/borrower.
3. There is a consensus that all forms of bank interest are forbidden rib#257;.
4. Even if the relationship was to be considered one of investment agency (silent
partnership), pre-specification of profits in such partnerships must be in terms of a
percentage of total profits, not a percentage of capital. The moral hazard
15
argument is ignored, and the principle of return being justified by risk is
highlighted.
The first point is clearly valid. One can easily see that by focusing on the liabilities side of
banking, the IRI fatw#257;, and its predecessors, ignored the nature of bank assets, which are
legally interest-bearing loans, forbidden by all jurists as a form of rib#257;. This renders the
IRI fatw#257; not relevant for conventional banks, the investments of which are not deemed
permissible.
On the other hand, as we shall see in Section 7, and noted in the third opening quote by
Saleh Kamel, Islamic financial institutions have managed to find permissible alternatives
to bank loans that are functionally equivalent to interest-bearing loans. On the other
hand, “depositors” at those institutions are not entitled to any rate of return, and
“investment account” holders are exposed to unnecessary levels of moral hazard and
adverse selection due to their exposure to losses. This problem has been solved practically
in Islamic finance by selling shares in closed-end “Mur#257;baÈa funds”, which are essentially
securitized claims to the stream of fixed payments of principal plus interest (mark-up), in
which the only real source of risk is default risk, as in the case of interest-bearing loans.
While this solution provides some of the banking functions of pooling the resources of
many savers and diversifying the portfolio by financing multiple projects/purchases, it
falls well short of addressing all the prudential regulation standards to which banks are
subjected.
We shall return to those issues in Section 8, arguing that a combination of the lax
opinions Islamic bank jurists have adopted and the IRI opinion on pre-specification of
profits as a percentage of capital can provide a coherent framework for Islamic financial
intermediation, and reduce current agency costs in the industry. Before turning to that
issue, however, we need to review briefly the background and practice of Islamic finance.
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<b>Links</b>

http//www.ruf.rice.edu/~elgamal/files/interest.pdf

Just want to know what you guys say about this.

Thanks
Sibghat