In the Name of God, the Merciful, the Compassionate.
Why can’t we charge interest to compensate for the loss caused by inflation?
Interest is absolutely prohibited. Charging interest to compensate for inflation is tantamount to robbing people of their livelihoods to compensate for global injustice, thus we will be worse off. Many Muslims today, have somehow managed to have their own personal way of interpreting the Quran and Sunnah to suit their unforgivable taking of interest other than the rightly guided interpretation of the holy prophet (s.a.w) and his companions, may Allah be pleased with them. Interpreting the Quran to suit one’s conduct is not Islam. One must rather make his conduct suit the Quran and Sunnah as taught by the messenger of Allah (s.a.w) and his companions if only one is a believer. In order to compensate for inflation, Islamic banks offer a lot of instruments that resemble the security and liquidity of an ordinary savings account while also providing a reasonable interest-free return. Meezan Bank, Pakistan’s largest Islamic bank has such services for its customers. For example, gold can be considered by a lender for making a long-term personal loan. That is, to give the loan in the value of gold to the borrower, he must pay back the value of gold after the long-term maturity of the loan. This is permissible by Shariah.
Gambling and stocks are the same so, why does Islam forbid gambling and permit stocks?
They are not the same, there is what the scholars of Islamic finance call IWAD (counter value) in stock investment. This is what makes them asset and service-backed, lest they become un-Islamic. Stocks invest in real assets. On the other hand, gambling is a zero-sum game, causes disproportionate risk and does not create employment and investment, and does not add any value to the economy. Gambling is haram and investing in stocks is halal. Stocks provide what is called Al Ghunm bil Ghurm (risk-based returns) based on publicly available information. Gambling is a game of chance that causes uncertainty, enmity, destruction, disagreement and loss. However, it is also important to note that one must make sure that the company he/she buys the shares deal only in licit goods and services, buying shares in a company that deals in illicit goods and services is impermissible per the shariah.
What’s the difference between a conventional lease and an Islamic lease (ijarah)?
An ijarah lease, unlike a conventional lease, is an agreement to rent out property or services called manfa’a. In an ijarah lease, the lessor maintains ownership and responsibility of the property or service while the lessee benefits from the use of the property and the resulting profit. In conventional financial leasing, the interest payments have to be made to the lessor whether the lessee gains benefit from the property or not. If the property is damaged through no fault of the lessee’s, the interest payments are still payable. So, the ownership risk does not entirely rest in the owner’s hands. Ijarahs, on the other hand, clearly distinguish between ownership and usufruct (manfa’a), and stipulate that rental rate, unlike interest rates, be known and agreed upon beforehand. In an Islamic lease, risk associated with the leased property or service remains with the lessor, who benefits from the rental payments.
I lack enough funds to buy factory equipment or a car, home or pay for an education. How do I avoid interest and still fulfil my short-term financing requirements?
The prohibition of interest by the Quran and sunnah is with specificity, so we obey for our own good. On the other, Murabaha (markup financing) is an example of an Islamic instrument that funds short-term capital requirements. For example, a customer approaches an Islamic bank with a request to purchase an item, promising to pay at a later date. The bank assesses the product and the customer’s collateral and agrees by making the customer its agent. The customer goes to the market and selects the product. The bank pays the vendor, charges the customer a markup profit, and the customer takes the product agreeing to pay later. This is instead of giving you cash to buy it now and asking for the cash at some later date, charging you interest in addition to the loan amount.
And because the bank bought and sold the asset to the customer, at a markup profit, the transaction is Islamically permissible. What this does is satisfy the very basic Islamic requirement of backing the transaction with an asset. The markup is no different from the profit any business makes for having provided a legitimate service. For home purchases, musharakah mutanakisah (diminishing partnership) schemes also provide the buyer with a financing alternative. In this case, the buyer approaches the bank with a down payment called arbun. The bank pays for the rest of the property and the buyer begins living in the property while paying the bank rent. Over time, the buyer buys back the bank’s equity in the house and reduces his monthly rent in proportion to his increased ownership of the house. Eventually, the buyer becomes the sole owner. The important point is that the Islamic bank participates in the customer’s ownership risk. These are some of the imperative questions often asked worldwide about Islamic banking and finance.
For more details and clarifications, you can contact our telephone numbers or email address below. And Allah knows best!
This write-up was done with the help of Ethica Institute of Islamic Finance learning materials, and we are grateful for that.
YAHAYA ILIASU MUSTAPHA
The writer is an Islamic Banking and Finance patron and advocate in Ghana.
Email: yahaya0246873726@gmail.com
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