The Islamic value system in economic life is a moral code for economic and social progress. For instance, when a “Muslim” applies Islam’s rules in work, science, justice, investment, construction and diligence etc, and when a “Muslim” rejects what Islam prohibits, such as fraud, injustice, ribba (profit without labour), ignorance, overspending, manipulation, monopoly etc. Sharia rulings make it essential to answer this key question: Is every “bank interest” considered forbidden ribba, in light of the evolution of the Western economic view of banking interest, on the one hand, and disagreement among Islamic scholars about bank interest, on the other?
First, I would like to note that early Christian beliefs prohibited ribba and interest. Saint Thomas Aquinas strongly condemned interest, since it is a debt and is therefore rejected. It was also morally rejected by professional merchants including agents, mediators, brokers and moneylenders. Political economy for centuries searched for a moral and scientific justification for interest, and even for profit. Western economic discourse vacillated between prohibiting and justifying banking interest.
Pierre-Joseph Proudhon argued against interest, saying that property revenues, especially interest, are considered a form of theft and herein he coined the phrase “property is theft”. Proudhon called for eliminating interest and any other profit from capital. David Ricardo argued that a capitalist usurps profit, interest and any other income from the value of workers’ production, which is what Karl Marx based his theory of surplus value on, and call for revolution.
Meanwhile, Nassau William Senior justified interest as the price in the form of interest or profit that must be paid to convince people, including capitalists, to refrain from consumerism in order to own factories, equipment, tools and products for sale. Since eliminating consumerism was not apparent in the living standards or spending habits of major capitalists and the banking class, who overspend and flaunt their wealth, this justification was no longer necessary. Alfred Marshall asserted that the need for interest was to “reward patience”, namely accepting less reward now for a larger reward in the future.
But there was no “reasonable and acceptable” premise for profit on capital until the 20th century, when profit became a reward for innovation and taking risks. Profit was seen as the reason to balance the interests and benefits of those who own more resources than they need or could use productively, and those who borrow money because their resources are less than their needs or what they need to be productive.
John Maynard Keynes, however, brought something new to the table by saying that modern capitalism could go in tandem with unemployment, which the state should deal with by increasing investment spending through lending. Hence, bank loans with interest or treasury bonds with interest were created for the public good. It also gave rise to theories of reversing deficits by addressing the gap between the state's budget revenues and expenditures, which resulted in problems of public debt and interest on it.
I reiterate that while Islamic Sharia prohibits ribba, scholars continue to disagree about banking interest and the issue is further complicated with the development of a variety of modern banking services and transactions. Without embarking on a scholarly debate about whether bank interest is ribba – a debate for which I lack the scholastic aptitude – I am noting that the rules of bank interest have been and still are disputed among scholars. There is no final decision about what is considered ribba and what is not; the same as it has been since the dawn of Islam when the forms of ribba were also undecided.
Al-Azhar’s Islamic Research Centre responded to a query by the Egyptian parliament about religion’s opinion on bank interest by issuing the following edict: Investments that identify profit in advance are halal (permissible by religion) and are in no way similar to ribba. Those who deposit their money and savings with any bank as their investment agent in legitimate transactions in return for profit or revenue that is dispensed to them and is specified beforehand on previously agreed upon timelines with the depositors, are without a doubt halal. This is because there is no text in the Quran or in the Prophet’s code of conduct that bans such transactions as long as both sides are in agreement. God sanctioned the exchange of benefits based on agreement, as long as it does not sanction what is prohibited or prohibit what is sanctioned. It is a form of benefits that are not part of a belief or ritual system that cannot be altered or juxtaposed. At the same time, the former sheikh of Al-Azhar confirmed the validity of interest on Certificates of Deposits (CDs).
Some objected to the edict by Al-Azhar’s Islamic Research Centre, including Mohamed Rifaat Othman who argued that bank interest are absolutely forbidden even if it is not ribba, since it is a form of corrupt exchange because specifying profit in advance creates a loss for one of the parties.
Taking a position that contradicts the right to alter interpretation, the Front of Al-Azhar Scholars rejected the edict based on a previous edict issued at a conference of Al-Azhar Studies Centre in May 1965. Meanwhile, Sheikh Youssef Al-Qaradawi also rejected the edict on the same basis. “We do not deny that there are faults in the Islamic banking system because the human resources there came from traditional banks, so their brains are programmed for ribba,” Al-Qaradawi asserted, stating that some Islamic banks will be implementing the necessary measures.
On the other hand, Abdel-Moeti Bayoumi supported the edict, stating that identifying interest beforehand guarantees that the money owner will not lose revenues or profits. Bayoumi was supported by Mohamed Ibrahim Al-Fayoumi, who added that dealing with banks with specified interest rates is sanctioned since the primary guarantor is the state, and the money that will be deposited in the bank will be used towards national industry and development. Al-Fayoumi continued that the concept of the lender exploiting the borrower does not apply to this transaction.
The edict was also supported by Abdel-Fattah El-Sheikh, but he cautioned against bank interests in general and that each bank transaction must be viewed separately and objectively. Also, that investment in projects should not contradict religious teachings such as investing in alcohol factories.
Finally, we must remember that in economic and moral terms the revenues of depositors and banks should not exceed the profits of borrowing investors. Interest on loans are considered ribba when it eliminates the necessary revenue to cover basic living needs, is more than the average profits of investors, and are applied to loans that are used to meet basic human needs. The “scholars of monetary houses” — as they were described by a prominent Islamic scholar — should not call for abandoning what is nine-tenths halal out of fear of ribba, while increasing ribba 10 times by fearing it.