Banking in
l Prohibiting Riba
Islam
Author:(I. A. Farooq)
(When did the question of banking in Islam arise? Also where and how?
These are all basic questions and possibly can be looked into from all
angles flowing from “Ws” of an Auditor (It will be my pleasure to ad-
dress and answer these questions). But for a short review it will be better
to remain in the limited sphere.)
One view is that banking circumscribes those branches of knowledge that
facilitate trade within physical limits of universe; the place or parameters
entrusted to man as Khalifa. This view means that some kind of bank-
ing or trade facilitation may have been the part and practice of centre(s)
of concentration of human dwellings that remained connected through
trade.
We, as Muslims, believe in flow of knowledge from ALLAH to man
through “Wahi” to guide him on the right path. Let me quote one incident
in recent history. When “Riba” become a practice of Bani Israel, it was
forbidden through commands revealed on Moses. But they observed re-
laxation in implementation of the code and Riba traveled with then where
ever they went. ALLAH, for his wisdom, Hikmat and destiny format,
did not punish then enbloc as happened with Ummah(s) in the past till
the last of the Prophets, Al-Nabi was born in Makkah. He placed before
all mankind, not mercly group(s) in limited space and time, the eternal
message of ALLAH. At Arafat, when he performed Haj, He among other
things, delivered message of ALLAH:-
l Leave forgive and forget all past Riba
l Transfer responsibility to Ummah to spread his message to end of the
space, time and to last of mankind.
The message in physical terms means and includes a state of Islam cir-
cumscribing one man to all mankind in relevant time and space to prac-
tice one “Deen” jointly as well as severally and beyond in all possible
permutations and combinations. At the time of his death he left behind
“The Book” and “his Example” to guide and keep Muslims on the right
and desired path. This then is gene of globalization and what he left be-
hind, beyond an iota of doubt, contains complete code command and
solutions to problems of Muslims down the time line.
With this very brief introduction, let us move a small step forward. The
systems of trade facilitations of relative past had disappeared, were not
deep and answering and solving latter difficulties, had limited application
and also included Riba, an element of practice that was forbidden. His-
tory of man in the relevant time and space as available in Qasas-ul-Quran
is the whole truth and not the account collected, unearthed, drawn from
faulty and vague human memories. The books specially in economics
side will need a complete re-writing after Riba is forbidden in Muslim
states in accordance with injunctions of Quran. It is law of the lands
that provide Riba a safe heaven to flourish and many may face questions
when times change.
Some websites mention that the Arab world became aware about “Riba”
of today in 1870 when digging of Suez Started and Anglo French Banks
came to Egypt. Their reaction was “No Riba” and “Riba free Banking”.
The obvious observations are:-
(i) For centuries Arab scholars had worked on Riba in trade. What was
their reaction to banking? It seems more likely that they had some con-
cept of banking or trade facilitations but had not given it a proper name
describing the cluster of activities. It is more likely that for this reasons
they started developing products on trade side to replace Riba. This was
a knowledge based exercise and not economy based as oil had not been
discovered until them. It was in 1908 that oil was discovered in Kuwait
and used to lubricate and drive European war machine. While Suez en-
abled then to maintain an iron clamp on India and beyond. Then came
the commercial use of oil and so far limitless wealth of Arab rulers and
Arab nationalism – partly a result of commercial activity influenced from 1.7.48 Opening of STATE BANK OF PAKISTAN on British Stan-
various centre(s) for even other reasons. dards
As regard our part of the world, the slaves, it was ruled by a combination 1935 Setting up of Reserve Bank of India
of European swords, colonial wisdom and local disorder. A very signifi-
1904 Beginning of cooperative movement
cant event was setting up of Fort William College at Calcutta. Surpris-
1900 Remodeling of banking laws and providing legislation for
ingly entire British commercial law was enacted from 1800 – 1900 AC
Riba based lending. Banks were not included among mon-
also creating a large number of local knights. Mohammad Iqbal was the
ey lenders.
one who chose to return the honor for known and unknown, expressed
and not expressed reasons. (The foregoing requires a complete research 1840 Bank of Bombay
which may be revealing). 1809 Bank of Bengal
Bank of Bengal came in 1809 and one at Bombay in 1840. The coopera- 1694 Setting up of Bank of England with discount rate as the
tive movement in 1904 and Reserve Bank of India in 1935. The atmo- axis and sole right of Note Issue.
sphere was slowly filled with branches if British Banks. Then “Riba” and 1550 Adding Interest to deposit Function – Lord Gresham’s
banking spread to completely command the economic scene. Modern Banking
Then ALLAH provided a safe heaven to Muslims of this part of the world 1545 Division of Roman church – Division of Riba into Interest
and Pakistan came into being. In 1948, the founder father of the nation and usury – Henry viii
declared opening of STATE BANK OF PAKISTAN – encompassing 1500 Discount market of discount houses facilitating fund flows
Banking as per law of the land. But he made it clear that it was duty of the by borrowing
STATE BANK OF PAKISTAN to arrange comprehensive research into
1400 Middle ages. Jewish Goldsmiths
the subjects of banking and economic system of Islam and prepare/draft
that system to be implemented in Pakistan. 1300 Extending Prohibition of Riba to Christian faith 1311
An effort has been made to trace the path of history and travel through a – Pope Clement v following a debate for over 1000 years
part of Quran to trace roots and requirements of some concepts. We know – History of usury prohibition – Christians hanged for prac-
that no new knowledge has been revealed by ALLAH after the departure ticing usury.
of Al-Nabi, whatever exists today looks to be borrowed from Al-Quran 1200 Presence of Italian Banks in England.
and used by mixing forbidden practices of past – pre Al-Nabi days. Sec-
ondly a banking system in Islam lies resting in books of history of Islam
and needs to b discovered.
Let us follow the British time line of Riba based Banking from 1.7.48
to Dark Ages as described in Dictionaries of Banking and Finance and
Encyclopedia Britannica.
Dark Ages
This Information is evidence to following:-
l Deposit function does not have roots in England.
l Banking existed in England in close proximity of Dark Ages.
The banks were Italian. We need to trace the gene of banking in Italy.
l Banking is not lending which was a business of Goldsmith.
l Banking means acceptance of deposits of money only….
l This was the basis of banking in Italy.
l There is no mention of Riba in this definition.
We may conclude that the British banking disappears into darkness. This
is why their economic history fails to answer questions on origin and
gene of banking.
Let us follow the cycle of Islam regarding economic development. From
Adam (AS) to the period before Mohammad (PBUH) we can trace and
feel from Quran evidence to trade circles in limited spheres of time and
space. There after there were at last regular travel routes from Makkah
to Syria (now) and Yemen. If we make a deep probe, it coincides and
appears as direct answer by ALLAH as having accepted prayers of Ibra-
him (AS) that he begged of ALLAH while obeying command of ALLAH
to leave his son and wife in Makkah. These trade routs then get linked
up to other trade routs on face of this earth connecting the then known
world. These customs of trade followed a process called “Bai” allowed
by ALLAH. This was based on cash or credit and later developed to be
supported by Modarbah or Musharkah for expansion or to suit events and
circumstances. In this journey Riba also entered the scene and gradually
became most important factor.
As Islam spread in Makkah and Madina, ALLAH sent his message
through his messenger (PBUH) to leave this practice. The Financial sys-
tem of Islam then was trade and agriculture and related professions and
their produce. This has been shown in Fig-1. With the coming into ex-
istence of state of Madina following components appeared on the eco-
nomic scene to support, sustain an expansion of the Islami state under the
Holy Prophet (PBUH).
l Bai, Agriculture related professions and produce
l Addition of Modarbah, Musharkah, Amanat
l Further addition of Sadqat, Ghaneemat
l Further addition of Zakat, Voluntary contributions
l Setting up of Bait-ul-Mal
l Regulation of Functions of this institution by Devine order
l Regulation of trade and commands to eliminate Riba
l Expansion of state of Madina to whole of Arab
l Total prohibition of Riba
l Responsibility of Ummah expended to end of time and space and last
of mankind.
l Completion of Deen, its codes in all respects.
l Death of Holy Prophet (PBUH).
That was the termination and end of institution of Risalat and Nabowat.
This was followed by Khilafat.
The Islami state continued to expand and so did its trade and economy
and components mentioned above. However during days of Umar-Ibne_
Khitab as the Caliph, a financial product was put in place by Zubair bin
Awam by combining credit and Amanat to support expansion of trade.
This product gained support of Ashab-e-Rasool. Some even may have
joined by adopting this practice (The words are very carefully chosen).
The qualities, features and facilities circumscribed by this function re-
semble that of deposit of today.
Their activities thus became like those of large trading houses support-
ing their activities by deposits. The persistent and continued use of this
financial technology can not but be termed as “Banking Gene”.
As the state further expanding and so did trade and economy, the product
needed support of other branches of knowledge such as:
l Arithmetic
l Accounts – Sector wise books
l Document development
l Expansion of Musharkah and its variations
l Many other support mechanisms
While this process moved forward it was helped by certain decisions of
Khalifa(s) and their companions.
l Merging currency into single coin fact. It is placed for consideration of Board responsible for publication.
l Not agreeing to proposals of paper currency or leather currency Although this is the end of Article, I shall be failing in my duty as a
l Transfer of funds from one Bait-ul-Mal to other research man if I do not answer the question written boldly and promi-
l Lending from Bait-ul-Mal for trading activities etc nently in time and space.
l Large scale economic activities such as canals, Madaris, copying Holy WHAT IS THE CHANGE MECHANISM?
Quran education etc Answer: ALLAH has been kind to guide a complete model of Sin called
l Completing the cycle of Islami welfare state Riba onto this research paper. He surly has showered his Rahmat and pro-
Let it not be all praises. Yes the fact is that later role of Bait-ul-Mal was vided an answer to this. Chapters 9 to 13 of the enclosed book may prove
diverted in questionable manner. Thus for this, as also other reasons, the useful reading. I may add that this book (English version) was presented
new banking functions found safe passage in private sector and by the at ICAP Karachi in 1994 when Mr. Safdar Abbas Zaidi (then Chairman
time all the above function were developed almost 100 years had passed. Investment Board) presided the presentation. This was through good of-
It was thus for Abu Hanifa (RA) to fully operate expand and implement fices of Mr. Bashir Chaudhry of Alzamin Mudarbah and Mr. Hussain of
banking function. He thus was the first man in history of Islam to have Hussain Shah Rehman (then). Mr. Sibghatullah DG STATE BANK OF
practiced full range of banking and thus established the principle of today PAKISTAN had duly authorized this presentation.
“Banking means acceptance of deposits of money only for the purpose of I believe this will give rise to further questions. Sir, I shall be more than
investment or lending, withdraw able by cheque ……….” happy to answer rather be present and share this face of Islam. (Fig III)
No doubt in practice of above components he only followed Quran and
Sunnah and his vision of both was far superior to that of today for obvi- WHERE TO START?
ous reasons (Fig-II) (CF Abu Hanifa ki Siyasi Zindagi-Manazir Ahsan WHY START WITH CURRENCY?
Gillani) 1. Riba in currency issue.
In the foregoing we have traced roots of 4 kinds of banking and the bank- 2. All products woven around currency.
ing gene. These can b described as: 3. Other un-Islamic element routed through currency.
Banking: Riba based banking practiced after middle ages. This is not our 4. Exchange rate problems.
role model for obvious reasons. 5. Shifting dealing from currency to accounts.
Interest Free Banking: Conventional Banking minus Interest. But it still 6. All Muslims to open ac-
continues to include practices not permissible in Islam. This experiment count to benefit from
has failed. Bail-Ul Mal. ( or dis-
Islamic Banking: By creation of products (compatible) for continuity of charge of duties to Bait-
system. Ul-Mal)
Muslims have not responded positively to this mode as well. Now that 7. All accounts Islami digit
we know banking, as it is available in Islam, it will be all the more dif- based.
ficult to follow this. Abu Hanifa (RA) a man of much deeper and wider 8.Complete documenta-
vision did not improvise any of the standard practices. People engaged tion.
in this exercise may match their substance with his concept. We need not 9. Change to Islami cur-
come in this picture. rency gradual.
Banking in Islam: It is believed that the aim of this article was to find this 10. Other impacts and ben-
efits.

Source: Al Huda - Islamic Banking