5- Muhammad Baqer as-Sadr and Islamic banking
At the heart of any legal debate over an alternative Islamic banking system lies the definition of the word riba. The word is mentioned several times in the Qur’an. In a concise form, the rule can be stated thus:’God has forbidden riba" (Q :II, 275). Depending on the domain subsumed under the word, a number of financial, commercial and legal transactions will be included in, or excluded from, the Qur’anic prohibition. The issue is complicated by the distinction, which appears in the hadith, between riba annasi’a and riba al-fadl.
Riba an-nasi’a is the classical form of riba, which entails -as in a loan -a fixed increase (riba comes from the root verb raba, yarbu, to increase) in the amount of money over a time period. Riba al-fadl, which occurs in a contract of sales when there is an increase in the terms of exchange themselves, is also prohibited following the Prophet’s injunction. A hadith mentions six commodities which constitute the object of riba al-fadl (the exchange riba):’ Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, each kind for each kind, in hand: he who increases or asks for an increase commits riba (arba), alike whether he gives or takes.’
In the modern banking world, it is the first riba, riba an-nasi’a, which is the main source of contention. If riba is defined as usury, then there is little problem in charging interest on transactions in the way of conventional banking. As long as interest rates do not hit unusual ceilings, which in any case are not quantified, the conventional banking system passes muster for the shari’a. If on the contrary riba is strictly defined as interest, then most operations by conventional banks are tainted with illegality. Between these two definitional poles the secular debate on riba has been built.
In the twentieth century, the re-emergence of the debate started in Egypt with the’Sunduq at-Tawfir’ affair and culminated in the discussions on the Civil Code. As capitalist penetration had developed in fin-de-siecle Cairo, a number of small-scale financial institutions had been created alongside the major foreign banks, following an imported model that had little concern for the religious sensitivities of the population. One of these small moneyhouses, the Administration of the Posts, established in the early twentieth century a’Savings Fund’ (Caisse d’Epargne, Sunduq at-Tawfir), which yielded to the depositors-savers a return in the form of a fixed interest.’ Over 3,000 from among the depositors refused, out of religious conviction (tadayyunan), to take their interest fixed by the decree of the Khedive’.
Consequently,’some men in government, including the director of the Administration of the Posts, asked the Mufti informally... if there was a legal way that would authorise Muslims to take the profit earned by their monies in the Savings Fund’.
In the account of Muhammad Rashid Rida (d. 1935), who was relating events that took place in 1903, the Mufti, Muhammad’Abduh (d. 1905), was dissatisfied with the system introduced by the Savings Fund:’He [Muhammad’Abduh] said: in no way can the mentioned riba be accepted, and since the Posts’ administration exploits the monies which it takes from the people [the depositors] and does not borrow from them out of necessity, it is possible for these monies to be put to use (istighlal) on the basis of the commenda partnership (sharikat al-mudaraba).’
The polemic over riba in the Posts Savings Fund involved important personalities in the Azhar and in government. The question of riba never subsided, and its circumvoluted history involved the best lawyers in Egypt, including the most famous jurist in the Arab world,’Abd al-Razzaq as-Sanhuri
and, more recently, the Egyptian Supreme Constitutional Court.
Sanhuri, who presided over the drafting of the Egyptian Civil Code, was keen on excluding rulings which were in contradiction to the shari’a.
Avoiding riba was central to Sanhuri’s concern, and he went to great length in explaining how the Egyptian Civil Code (as well as most other Arab Codes which were modelled after it in Syria, Libya, Kuwait, and Iraq) was consonent with the shari’a in this respect.
Until the establishment of the new Civil Code, the civil laws of Egypt had been constituted in the main by a mixed system partly inherited from French laws, and partly fashioned by Qadri Basha’s Murshid al-Hayran.
In the mid-1930s, a committee was established for the drafting of the new laws, and’Abd ar-Razzaq as-Sanhuri was entrusted with bringing the project into a full Code. The work took more than a decade, and in 1949, the new Egyptian Civil Code was passed into law.
Among the rules which had been thoroughly studied were the dispositions on interest. In the former Civil Code, the article related to loans and interests permitted, in the fashion of the European Civil Codes of the time, interest limited by a maximum rate. Article 125/185 read:
‘ It is absolutely forbidden for the contracting parties to agree on interests that exceed eight per cent per annum... Any agreement stipulating an interest rate that exceeds this limit will be reduced to the maximum interest rate allowed [by this law] in the contract.’
When the door was opened to redraft the old rules, the place of the shari’a in the Code was obviously a matter for long discussions, and the introductory articles placed it as one of the major sources in the Egyptian legal system. The debate between’Abduh and the Khedive rebounded, and acquired wider importance because of its crucial area of application, Egypt’s civil laws sphere. The question was whether a fixed interest over a contractual loan would remain possible.
On the whole, the old principles remained, but some measures were retained to keep the disposition under check:
(1) Article 232 stipulates that’interest on interest is prohibited (la yajuz taqadi fawaed’ala mutajammid al-fawded)’ Under the previous Code this type of interest was permitted under two conditions (a) that accrued interests (al-fawa’ed al-mutajammida) would be running for no less than a year and (b) that an express stipulation in the contract between lender and borrower would permit an interest accrual. In the absence of such contract, the creditor-lender would have to bring the matter before the court for a decision.
(2) If borrower and lender do not agree on an interest on the loan, Article 542 considers that’the loan will be deemed interest-free’.
(3) In case of delay after the payment is due, an interest of four per cent in civil and five per cent in commercial transactions will eventually be owed by the defaulting borrower (Art. 226). In this case, procedural rules are favourable to the debtor. A summons by the creditor, even if official, would not be sufficient for the legal interest to start running.
The lender-creditor must file the complaint with the court, and specify in the writ brought to the tribunal that his right is not limited to the principal (ra’s al-mal), but extends to the interest arising from the delay.
(4) The totality of interest due will not be superior to the principal. But this disposition, adopted probably from the Qur’anic injunction,
is not taken into account for long-term productive investments (Art.232).
(5) If the creditor proves bad faith in claiming the debt, the judge is allowed to reduce the legal interest, and even completely dispense with it (Art.229).
(6) If the borrower decides to repay the loan before it is due, Article 544 allows him to proceed without requiring the lender’s agreement.
Accelerated repayment cannot be precluded in the contract. But the borrower can exercise his right only six months after the contract, and he has six months, after the declaration of his intent to repay, to accelerate the payment of the debt to do so. The debtor incurs the interest on the debt for the full six months.
Despite all these stipulations in favour of the debtor, the most important principle adopted by the Civil Code is posited in Article 227:
The contracting parties can agree on a different rate of interest, whether in return for a delay in the payment [this is related to Art. 226] or in any other situation [which includes the loan for interest], on condition that this rate does not exceed seven per cent. If they agree on an interest that exceeds this rate, this interest will be reduced to seven per cent, and any surplus already paid must be returned [to the borrower].
It is at the end of a long debate that the architects of the Egyptian Civil Code reached these conclusions which, except for some constraints on the creditor’s stronger position, do not put into question the legitimacy of lending for a fixed interest. In his Masadir al-Haqq fil-Fiqh al-Islami,
which were developed in a series of lectures given in Cairo between 1954 and 1959, Sanhuri offers a lengthy analysis of riba.
Riba, in the general system of obligations and contracts, is classified along with other’ vices of consent’ which (in French legal terminology) nullify a contract. In this perspective, riba is considered to be a major constraining factor behind the freedom of contract.
Because of the acceptance by the Egyptian Civil Code of interest arising from various contracts, and mainly loans, Sanhuri’s understanding of riba is qualified by the necessity to abide by the dispositions written in the Code.
The whole defence of Article 227 is based on a double syllogism.
The starting point of the syllogism is that’ riba is forbidden’, and that there are three main reasons for the prohibition:’(1) To prevent the hoarding of people’s foodstuffs; (2) To prevent speculating on currency, so that currency does not become itself a commodity; (3) To avoid unfairness and exploitation when the deal is related to a single commodity.’
The two first reasons derive from simple public policy considerations. The third reason sheds light on the question of riba al-fadl, which, according to the hadith, is denned as the prohibition of the sale with an increase (riba) of two commodities of the same kind. For Sanhuri, this classification is an important element in the articulation of the syllogism.
This form of riba, riba al-fadl, writes Sanhuri, is forbidden in classical Islamic law as a prohibition of means (saddan lidh-dhariia). It is not forbidden per se, because it is meant to stand in the way of the more fundamental riba of the Jahiliyya (pre-Islamic era of’ignorance’), riba annas?
a. Riba an-nasfa, however, is absolutely prohibited. It is prohibited per se. There are consequently different degrees of prohibition, and some are less absolute than others. The forms of riba that are prohibited for themselves can only be excused in case of absolute necessity. But those forms of riba which are prohibited because they can constitute a first step towards the original riba an-nasfa do not fall under the same prohibitive regime. They, unlike riba an-nasfa, can be tolerated in a situation of need.
For Sanhuri riba an-nasfa merely means anatocism. It is the combined (murakkab) interest, which makes money deriving from interest as important as the original capital. This, he adds, has been forbidden by the Egyptian legislator in Article 232 of the Civil Code.
In Sanhuri’s second part of the syllogism, the original ban on riba falls in the category of sales. It is in sales that the vice of riba operates, as is testified in the juxtaposition of the good sale, allowed by the scripture, and the bad riba, forbidden in the same verse 275 of the second sura.’Loan’, writes Sanhuri,’is not in Islamic jurisprudence one of the root (asl) ribawi contracts. It is the contract of sale which is the root, and a loan will be measured against a sale.’
But the opposite is not true. The sale contract, as root, cannot be measured against the derivative category of loans.
Following the syllogism, the root and the derivative cannot be addressed legally in the same manner, and the prohibition attached to a root contract is more absolute than the prohibition attached to a derivative transaction. Consequently, what is forbidden per se will yield, as in the case of riba al-fadl, to need. Need, and not necessity as in the root contract, will open the way to the alleviation of the prohibition, and in a capitalist society like Egypt, the need for loans is overwhelming, and common. It is at the heart of the economic system. As long as it does not become anatocism, as in Article 232, it must be tolerated by the legislator in accordance with the shari’a.
Thus is the Egyptian system vindicated.
By a series of syllogisms, Sanhuri shows that Article 227 is founded in the shari’a. It is clear that the avoidance of the concept of loan in the article was helpful in avoiding confronting the debate head-on, but it is true that Sanhuri also produced a sophisticated if unduly complex, legitimisation of the loan for interest.
This did not prevent the polemic over riba from continuing, until the challenge of the Civil Code provisions on interest (particularly Art. 226 and Art. 227) before the Supreme Constitutional Court of Egypt in 1985. The Court was able to avoid dealing with the issue on a technicality, but it is clear that the cyclical resurgence of riba would remain.
A similar process took place in Iran. The Iranian Civil Code, which was passed in stages between 1928 and 1935, originally stipulated:’The debtor can give a power of attorney to the lender, in binding form, providing that during the time that the debt is incumbent upon him, the lender may transfer to himself, from the property of the debtor, a specified quantity of things gratis’ (Art. 653). Behind the cryptic formulation lurked, as in the elliptic words of Art. 227 of the Egyptian Civil Code, the underlying permission for charging interest, for this indeed is what is meant by’ the specified quantity of things to be transferred to the lender every month or every year, in binding form’. But, as could be expected, the reaction of the followers of Khumaini would be more radical than in Egypt. Whilst most of the Code has been retained, the caption’hazfshodeh’ (deleted) has been appended to Art. 653 in the present editions of the Iranian Civil Code. But it is true that loans for interest were not specifically forbidden.
While the exact definition of riba is still widely debated, the advocacy of an economic and financial Islamic system has given way more recently to conceiving and setting up alternative non-ribawi (interest-free) banks. Before the development of this phenomenon across the Muslim world in the mid-1970s, Sadr had written extensively on riba and the conceptual framework of an Islamic bank.
Iqtisaduna on riba and Islamic economics
The concern with riba was not confined to Egypt, and in the early 1960s, the issue also surfaced in Iraq.
Iqtisaduna, inevitably, had a word to say on such an important matter, and Sadr discussed in it the prohibition of riba as a rule of considerable effect on the system of Islamic economics.
On the definition of riba proper, Sadr’s departing point appears simple in contrast with the lengthy elaborations of the Egyptian jurists. He gives little consideration for the subtleties between riba al-fadl and riba an-nasi’a, avoids discussing the exceptional circumstances warranted by need or necessity, and starts with an outright condemnation of loan with interest.
Riba in loan is haram (forbidden) in Islam, which means that you lend somebody money to an [agreed] time against interest (fa’ida), which the debtor (borrower) pays you when returning the money at the agreed time. Loan is forbidden except when free (mujarrad) from interest. The creditor is only entitled to a return of his money without supplement (increase, ziyada), however small the supplement may be. This legal disposition is considered, in its clarity under Islam, among the necessary rules (daruriyyat) of Islamic legislation. (I 544)
In Iqtisaduna, there is scarce mention of the banking system. The issue briefly surfaces on the occasion of the discussion on production. In that, Sadr adds little to the arguments expounded earlier by modern jurists like Muhammad’Abduh or Rashid Rida.
The essential argument is based on the encouragement under the scheme of mudaraba of long-term projects as opposed to the short-term focus of capitalists lured by fixed, risk-free interest, in which, unlike in the mudaraba, they are not directly affected by the viability and soundness of productive investments (I 591-2).
More interestingly, the issue of riba in Iqtisaduna is analysed from the various angles of its impact on the distribution system. It comes for instance, as mentioned in chapter 4, at the origins of the distinction between compensation (salary, wage, ajr), which is allowed as financial reward not involving participation in the result of economic ventures, and profit, which is based on participation in the final result. In Sadr’s system, for the tools (adawat) of production defined as’the things and machines (ashya wa alat) used in the [productive] operation, like the spinning machine (maghzal) and the plough..., the reward is legally limited to only one type (uslub): compensation (ajr)’ (I 556). Tools of production and capital are opposed (muta’akisan):
Commercial capital stands in contrast with tools of production. It is not permitted for capital to expand on the basis of compensation (salaries, ujur, plural of ajr). It is not permitted for the owner of capital to lend his money for interest, i.e. that he gives it to the entrepreneur (worker,’amef) to trade with and earn compensation for his work, because compensation is characterised by certainty (daman) and independence from the practical results as to profit and loss. It would otherwise be riba It is however possible for the owner of capital or of a commodity to make available his property to the entrepreneur to trade with and be solely responsible for losses, and in case of profit, to share the profits on a percentage basis. Participation in profit as well as loss is the only way (uslub) legally open to commercial capital. (I 557)
The contrast between the legal regime of land and tools of production on the one hand and money as capital on the other hand appears as one of the major’ irradiations’ of the legal system on the structure of distribution. From the prohibition of riba derive also other rules in Iqtisaduna (e.g. / 544, 556, 564, 575, 592), of which the most important is’the linkage of the prohibition of riba with the negative side’ of another rule, the prohibition in Islam of earning money without investing work in a venture (I 558, 564). Then the essential question of riba in the distributive process is formulated in the following manner:’Why is it possible for labour to earn money on the basis of participation in profit, and not possible for such a participation on the basis of production ? Why have the tools of production been prevented from this way of making money when the owner of commercial capital or of land can earn money in this very way?’ (I 568).
The answer must be sought in the Islamic scheme of pre-production distribution.’The owner of land in a contract of muzara’a, the owner of capital in the contract of mudaraba... who are allowed a share in the profit [on capital or on land], are in reality the owners of the material that the worker uses (mumarasa)’ (I 570). Under the principle of’permanence of ownership’,
labour in the case of land or capital is considered to be stored (mukhtazan). It is not so stored, Sadr explains, in the case of the tools of production. The owner of the tool has merely the right to let it. Like the person who gives another his net to fish with, the jurists have allowed no right to a share in the product of the owner of the tools of production. The only right of the owner of the fishing net or of the tool of production is immediate (mubashar), and takes the legal form of compensation (ajr) on the work resulting from the use of the productive tool (I 570).
Clearly, Sadr’s use of riba in Iqtisaduna was not significant in financial or banking terms. The rules on the prohibition of riba were introduced to bolster the scheme of ownership of land and of the tools of production. Riba was important as a contrasting point to the agricultural and industrial sectors of the Islamic economy. But this was not the Najaf jurist’s last word on the subject.
Riba in al-Bank al-la Ribawi fil-Islam
Complex as it may have been, the previous debate on riba was impressed with one major characteristic. It operated in a negative manner. The thrust of the discussions was centred on the definition of riba, and included little by way of a positive construction of a viable alternative in the contemporary financial world.
This attitude was understandable, and reflected an economic situation which was not concerned with the mobilisation of a vast surplus of liquidities.
The oil boom changed the picture of money flow radically, and one urgent problem facing the Arab and Islamic world was how to utilise effectively the petrodollars without openly flouting the shari’a. The debate shifted to the Arabian peninsula and to the oil-rich countries of the Gulf.
The question of riba emerged again, but the context was different. For those concerned, the premise was that riba simply meant interest, and loans for interest -the backbone of banking operations -could consequently not be accepted. The question revolved on the possibility for a bank, as it is known in Western capitalist countries, to lend its money and make profits without charging interest on these loans, and to attract deposits from its clients without rewarding them with a fixed interest.
In theory, the answer was simple. The key concept was mudaraba, and the contract of mudaraba was to replace the loan and deposit for interest. This had already been the answer of Muhammad’Abduh at the turn of the century.
In view of the complexities of the banking world, more was however needed, and the Egyptian financial forays were no more than intellectual skirmishes. In the late 1960s, the urgency of investing oil money prompted some circles in the Gulf to look into the riba prohibition from a positive angle. It was not any more a question of simple obligations as in Articles 226 and 227 of the Egyptian Civil Code, but the whole set-up of’money-houses’, their internal structure as well as the exact form of their various operations.
To date, the most original work on the subject remains Muhammad Baqer as-Sadr’s.
A sign of the new platform of concerns was the relegation of Sadr’s discussion of the problems connected with the definition of riba to the book’s appendix. In this appendix (IFB 164-83), Sadr tries’to tackle, from the jurisprudential (fiqh) point of view, the various legal arguments (takhrijat) which aim at transforming interest (fa’ida) into a legitimate profit and at developing it in an acceptable (mashru1) way’ (IFB 164).
Sadr was manifestly disturbed with the various excuses which work towards justifying charging interest on transactions, and he sets out to undermine the arguments systematically. Several such justifications are discussed. For our purposes, the presentation of two main arguments is sufficient.
One legal justification is based on a distinction made in the loan operation, between the money on which the contract is made and the operation of lending itself. Under this justification, if interest is charged on the money as the object of the loan, it is riba. If, however, it is attached to the operation itself, it becomes ju’ala under the law.
A definition of ju’ala was already given in Iqtisaduna: Ju’lala’ Sadr then wrote,’is permitted by the shari’a. Julala is the undertaking (iltizam) by a person to offer a reward for another person’s purposeful legitimate action (mukafa’a’ala’amalsa’egh maqsud)’ (I 546). The example given is of a person who offers a reward for another who looks for his lost book, or weaves him a cloth. In al-Bank al-la Ribawi fil Islam, the justification of interest is exemplified by the’person who sets up aju’ala in which he establishes a fee (ju’l) on a loan, e.g. who says: he who lends me a dinar gets a dirham’ (IFB 165). In this way, interest would be charged as fee on the operation of lending, and not on the money lent.
Sadr offers two reasons to invalidate this justification: from a’minor’ point of view (minjihat as-sughra), this can be considered as a pure artifice of the language. In reality, the concept of ju’ala is misplaced. Ju’ala operates only in matters’involving labour, and not money’(IFB 166). From a major point of view (min jihat al-kubra), even if we suppose that the intent of the reward was indeed the lending operation, an essential element of the ju’ala is undermined, which is its intimate connection with the concept of’ ujrat al-mithr.
The money to which aju’ala is’equivalent’ can only be the money rewarding work. It cannot be money rewarding money, since this would logically mean that compensation is duplicated, as the price would be both in the activity carried out (in a normal ju’ala, e.g. weaving the cloth; in the ju’ala of lending, the operation of lending) and in the object of the activity (the cloth, the money lent). This is unacceptable under the shari’a (IFB 166-8).
Another legal justification for the charging of interest can be found in qualifying the lending operation in a different form, for instance as a sale.
This is the classical example of A selling X to B for a sum of money Y, with the understanding that B would resell X back to A at an agreed time with an increase y on Y. With X just a token, the operation of sales would be in effect a loan in which A is the lender, B the borrower, Y the capital lent and returned, and y the interest.
This, and the variations on the theme,
are discarded following’assayyed al-ustadh dama zilluhu’
because they are simply’loans which have been disguised under sales’. This rejection, from a minor point of view, is based on’the representation of the parties’ real intent (tashkhis al-murad al-jaddi lil-muta’amilayn)’. Clearly real intent is here the loan not the sales. From a major point of view, the rejection is based on’the extension of the ambit of loan on customary basis (bi hasab al-irtikaz al-’urfi)... The sale of [money against more money] on credit is a customary loan (qard’urfi)’ (IFB 176-7).
The whole debate in this section remains, in the vein of the Egyptian discussion, negative, and this is peripheral to Sadr’s purposes, which, in the text of al-Bank al-la Ribawi, were mainly directed at convincing the reader of the viability of an interest-free bank in its full operational capacity.
An Islamic bank in an adverse economic environment
The context in which Sadr wrote his scheme of an interest-free bank was quite different from both the time of Iqtisaduna and the later period of revolutionary fervour in Iran and Iraq.
The difference with the early 1960s was in the new emphasis in presenting Islam as an alternative to Capitalism. In Iqtisaduna, the concern with Capitalism was inversely proportional to the fear of Communism. But with the new flow of money, Islam had now to appear as a convincing alternative to the seemingly boundless capitalist energy released by oil.
Sadr took advantage of a query addressed to him by a committee based in the Kuwaiti Ministry for awqaf (endowments), to bring this project to fruition (IFB vi).
From the outset of al-Bank al-la Ribawi, a distinction was made between a bank established’within a comprehensive planning of the society, i.e. after [Islam] has taken over the leadership in all sectors (marafiq) of society’, and between’an interest-free bank established regardless of other aspects of society, i.e. with the supposition that the bad (Jased) state of things in place continues, as well as the un-Islamic framework of society, the persistence of the other various institutions, banks and others, and the domination (tafashshi) of the capitalist system in letter and spirit on the economic, mental, and ethical (khulqi) life of man’ (IFB 5).
Sadr acknowledges the difficulty in forming an institution which, within the system, would be operating against the stream.’The fragmentation of practice’ and’ the partial application of the idea of the prohibition of riba’ entail that the principle’will not come to total fruition’. This should however not’constitute an excuse for shying away from the [proper] legal application wherever possible’ (IFB 6). It is absolutely necessary that, within these constraints, the interest-free bank, through abiding by the dominant law,’ remains able to function and prosper within the frame of the surrounding reality, as a commercial enterprise aiming at profit’; in other words, as a bank’ which has the same role as other banks in the economy,...
a vanguard role in developing countries,... and the effective participation in the development of industry’ (IFB 9).
The interest-free bank: introductory remarks
The prototype of the interest-free bank is vital for the ideological battle of Islam. Some sacrifices will be made’to carry the burden of the [Islamic] message and the preparation to save the community and its institutions from their state of disbelief, kufr’ (IFB 12). In order to rid the world of riba, the first principle is the necessary’emphasis on the element of human labour as the source of revenue (dakhl), as opposed to the element of capital in banking activities Whereas the ribawi bank exercises its activities in its quality of capitalist person, the interest-free bank insists on its quality of labourer’.
This appears, on the one hand, in’the emphasis of the interest-free bank on revenue (‘umula) as a salary for work (ujrat lamal), and the increase in profits on the basis of these revenues (‘umulat)’. On the other hand, it appears’ in the interest-free bank’s refusal (ta’affuf) to take interest on loans, because this interest is revenue on capital and represents capital’s ribawi power’ (IFB 11).
Within this setting, Sadr admits one exception, when the interest-free bank deals with conventional institutions working on the basis of interest.
While refraining from lending against interest, the interest-free bank can’indulge in placing deposits bearing interest in the banks that belong to people who do not believe in Islam, or in banks of states that do not adopt Islam as a system of government’ (IFB 13). Two arguments are advocated by Sadr to defend this position:
(1) One argument is based on realism. It is because of the mere existence of such conventional banks that the interest-free bank is forced to find itself in unfair competitive practices.
(2) Legally, several jurists, both among the Shi’is and the Sunnis, like Abu Hanifa himself, have permitted the practice of riba with non-believers (dhimmis), and allowed taking profit (ziyadd) from them (IFB 13-14).
After these preliminary remarks, Sadr introduces his discussion of an Islamic bank by setting some of the parameters chosen for his study.
In the first place, he posits the distinction between an Islamic bank operating in an’Islamic’ environment, where all riba is prohibited, and an Islamic bank operating in competition with interest-bearing capitalist institutions. In his 1969 scheme of the Islamic bank, the discussion deals only with the latter category.
Secondly, Sadr underlines the general principle which underlies the whole system proposed in Iqtisaduna, and which establishes as well all profitmaking in an Islamic bank: the emphasis is not on the revenue-generating power of capital, but on the wealth-creating power of human labour.
Thirdly, a dose of realism is said to be necessary. An Islamic bank, Sadr writes, cannot avoid dealing with conventional banks on a fixed interest basis.
This realism is well-founded in Islam, both from a historicaleconomic and from a legal point of view.
There follows that, from an economic point of view, the prototype of a bank is based on its role as mediator (intermediary, wasit), between depositors and investors-entrepreneurs. From the legal point of view, the bank’s operations are generally constituted by two independent legal relationships :
the bank is a debtor of the depositors, and a creditor for the entrepreneurs.
In conventional banking therefore, the bank does not operate legally as an intermediary, but as a full party to the transactions: the link between, on the one hand, the pool of funds constituted by capital and deposits, and loans for business on the other hand, is completely severed.
‘ As a debtor of the depositors, the [conventional] bank pays them interest if their deposits are not under demand [i.e. fixed], and as a creditor to the investors, the bank receives a higher interest... It is in this way that the regime of deposits and lending associated with the riba forbidden by Islam’ can be established (IFB 20-1).
Sadr’s alternative is based on the following reasoning:
The basic idea that I am trying to expose in order for a bank to develop on an Islamic basis which would protect it from dealing with riba is premised on the separation in the deposits the bank receives between fixed (time, term) deposits and mobile (current, demand) deposits (wadcfe1 thabita wa ukhra mutaharrikajariya). (IFB 21)
Instead of the fiction necessary to conventional banking, which ignores the economic role of the bank as an intermediary and severs the connection between deposits and loans, the theory of Islamic banking proposed by Sadr enhances this role, and establishes a correspondence between the bank’s resources (Capital + Deposits) and the bank’s investments in loans. By classifying deposits as fixed and mobile, the theory is mainly directed towards the positioning of the bank as an intermediary for long-term deposits and loans.
Before addressing the main theme of Sadr’s work, the bank in its activities as the intermediary party between depositors and investors for long-term deposits, the analysis will turn to Sadr’s conception of the regime of fixed and mobile deposits.
The interest-free bank between depositors and investors
A The regime of term (fixed) deposits
The central operative contract in the bank’s intermediation between investors and depositors is the mudaraba, the commenda (also translated in the literature as’partnership for profit and loss’).
Sadr defines the mudaraba as:
a nominate [special, khass] contract between the owner of capital [lender, mudarib] and the investor-entrepreneur [borrower, mustathmir] to establish a trade [or enterprise] with the capital of the former and the labour of the latter, whereby they specify the share of each in the profit on a percentage basis. If the enterprise is profitable, they will share the profit according to the agreed percentage; if the capital remains as it was, the owner of capital will receive his capital back, and the worker will get nothing. If the enterprise makes a loss, and the capital is consequently diminished, the owner of capital only will bear the loss. (IFB 25)
The three parties to the mudaraba are therefore the depositor (mudarib), the entrepreneur-investor (mudarab, mustathmir) or agent Camel), and the bank which is the intermediary between the depositor and the entrepreneur, as well as the agent (wakil) of the owner of capital deposited in its safes.
Rights and duties of the depositor. Among the duties of the depositor in the interest-free bank, two are important: (i) The depositor cannot withdraw his money before six months; (2) The depositor must agree to the principle of mudaraba. The deposit need not be tied to a special transaction. Small deposits will also be accepted to enlarge the overall operational pool of the banks.
As for rights, once the money is deposited in the bank, the depositor retains his ownership of the amount deposited, but this amount is added to the pool of deposits which constitutes the capital invested in the business projects.
The deposit is beneficial for the depositor in three ways:
(1) It is guaranteed by the bank. The investor must not be asked to guarantee the deposit under the terms of the mudaraba, but there is no rule preventing the bank, as third party, from offering its own safeguards to the depositor (IFB 32-3)
(2) Instead of a fixed return on his money, like in conventional banking, and as an owner of a share in the investment, the depositor receives a percentage of the profits made by the investment. In this way, the return is proportionate to the investment profitability. Loss, adds Sadr, is unlikely, since the deposit is tied not to a particular project, which might be independently unsuccessful, but to the totality of the bank’s investment activities. How is this share calculated?
Sadr offers an arithmetical example to develop his argument (IFB 34-6).
The argument is not easy to follow, but it is interesting as an example of Sadr’s concern for practicality. The example is here reproduced according to the three lines along which it operates:
(a) Total deposits: 100,000
Profit: 20%
Interest paid by a conventional bank: 5 %
In this case, the Islamic bank ought to pay twenty-five per cent of the profit, so that its rate does not get below the rate offered by a competing conventional bank.
(b) Consequently, the share of depositor = Interest + interest x risk (of nonprofit, i.e. not having enough profit because of general circumstances) + interest x incomplete use of deposits.
(c) If interest rate = 5%
and risk of non-profit = 10%,
then, increase = average interest rate x risk of non-profit of the mudaraba. The equation will then be increase = 5/100 x 10/100 = 1/200 and total share of depositor = 5/100 4-1/200 = 55/1000.
This last rate is called by Sadr’share of profit’ on the mudaraba. If the expectation of profit is twenty per cent on a capital of 1000 dinar,
then profit = 200 dinar,
but the share of profit = 55 dinar
and the percentage of the depositor’s share of profit = 55/200 x 100 = 27,5% of profit.
(3) The third advantage to the depositor is his ability to withdraw his deposit. Since these deposits are’time’,’fixed’ deposits, the bank can regulate them in such a way as to give more flexibility to the depositors’ right of withdrawal. The depositors in this scheme should be able to withdraw some of their monies almost at will, since all the depositors will not be expected to withdraw their monies simultaneously. Sadr offers several ways to enhance the flexibility of the withdrawal process (IFB 38-9).
Rights and duties of the bank. The bank is not properly a full party to the mudaraba transaction. As an intermediary between the two fundamental parties, the investor and the depositor, it enjoys however special rights and obligations.
The bank receives a julala (fee, commission, remuneration) for its intermediation in two ways. The first is a fixed salary (ajr thabet) on its work.
In conventional banking, this work is rewarded by the difference between the interest given to depositors and the interest earned on the loans. The Islamic bank operates differently, since it cannot relegate, as conventional banks do, the ultimate loss to the entrepreneur-borrower.’ Therefore’, concludes Sadr,’the salary of the Islamic bank should be higher than the interest differential of the conventional bank’ (IFB 42).
The second aspect of xhzju’ala is the share of the bank in the entrepreneur’s profit. Sadr proceeds by comparing (in a rather confused way) the approach of conventional and Islamic banks to capital, and notes that the Islamic banks, although they do not share in principle the idea of’the salary of capital’ (ujrat ra’s al-mal), will be compelled to develop such an idea under conditions of competition with conventional banks.
In conclusion, he states that’the Islamic bank will subtract from the profits (on the mudaraba project) what is over the agreed share of the agent of the mudaraba, and this part of the profits from several mudaraba operations is the total amount of the profit that should be distributed between the bank and the depositors’ (IFB 47).
The bank will also enlarge the pool of money available for investment with parts of its own capital and with what it considers feasible to invest from the deposits on current accounts. In this case, the bank becomes the mudarib itself, and will be entitled to the full share of the money guaranteed and the returns constituted by the value of the risk of capital. However, the bank will invest the money of its depositors before using its own money.
Rights and duties of the agent-entrepreneur. The entrepreneur, whether dealing with a conventional bank or an Islamic one, is the’ absolute possessor of the right’ on the profits of the enterprise in which he or she is engaged. The interest paid by the borrower-entrepreneur to the lending conventional bank is equivalent to the total amount paid by the entrepreneur to the Islamic bank in terms of fixed money + percentage of the profit to the depositor.’ But the Islamic bank earns in addition to this [sum] a share of the profit realised by the agent, which amounts to the difference between the price of guaranteed capital and the price of capital the value of which has been at risk’ (IFB 49).
This increase stems from the guarantee that the bank offers to capital in case of loss.
Since the bank covers the loss of capital in the Islamic system, the survival of the Islamic bank is obviously premised on the profitability of the project.
How can the bank protect itself from unscrupulous borrowers who know that the loss of their projects will ultimately affect the bank, as these borrowers would stand to lose nothing except the time involved in the project?
Sadr’s answer is of a more psychological than economic-legal nature, as he insists on the necessity for the bank to deal with honest and capable entrepreneurs, and to scrutinise every project. This, says Sadr, should help projects which involve specific and punctual commercial deals. For longterm economic projects based on the establishment of a commercial institution, the bank can supervise the company directly.
B Profit and the Islamic bank
Sadr introduces the discussion on the profits of an Islamic bank as an accounting problem. He reviews the situations in which the projects sponsored by the bank do not correspond in the accounting of their revenues with the bank’s annual reports, then devises a number of simple ways to assess the profits in view of an eventual return for the bank’s depositors.
More interesting however is the analysis of the profits distribution for the proposed Islamic bank.
The answer to the question would be easy, Sadr suggests, if all the fixed deposits were to be exploited at once. That would render the factor of time equal in all situations, and the arithmetics of the distribution of profits would be as simple as dividing the total amount of profits by the ratio of deposits.
In reality, deposits do not enter the bank all at the same time, and they do not get the same type of return. It would be extremely difficult for the bank to trace each return to each deposit. On the other hand, if only the factor of time is taken into account for the distribution of profits, one would return to a manifest ribawi situation, where a deposit-loan in the bank would be automatically rewarded according to its quantity and the amount of time it has been sitting with the bank.’This is why we suggest that the bank establishes its accounts on the supposition that each fixed deposit which enters its safes will start being exploited two months (for example) after the deposits (this calculation varies according to the conditions of commerce, and to the degree of general demand for capital), and that it would not start being exploited before’ (IFB 58).
There remains the point that one deposit might be more profitable than another deposit. The way out for the bank is to equalise all deposits by asking the depositor to agree to a general rate of return on the whole pool of deposits, and not to a specified rate on his own deposit.
In effect, Sadr’s proposed system transforms the classical two-party mudaraba contract into a multiparty system epitomised by the pooling of the totality of deposits.
C The regime of mobile deposits (IFB 65-8)
The legal status of mobile deposits,’ which generally constitute the current account’, is much simpler than the one which characterises fixed deposits.
Because of the uncertainty and instability of these deposits, which can be withdrawn on the depositor’s demand, mudaraba is more difficult to carry out on their basis. In turn, no interest or compensation will generally be paid on mobile deposits.
The bank can, however, differentiate between several types of such deposits. Part of the mobile deposits will be kept by the bank to cater for the liquidity necessitated by the nature of the deposits to repay depositors on demand. Another part will be used in mudaraba operations. This time, however, the bank will act as entrepreneur, and not as intermediary. A third part will be used by the banks to help cover the needs, other than in mudaraba projects, of its best clients. This should not, adds Sadr, relegate mudaraba to a second place. After all, the importance of an interest-free bank in a conventional environment is to encourage a climate in which mudaraba becomes the norm rather than the exception.
In the use of mobile deposits, the bank will pay attention to a number of conditions. The borrower must have a good established reputation, and the bank must be able to assess the validity of the operation undertaken. To this effect, collateral may be required from the borrower as security. Repayment of the loan must not exceed three months. This will guarantee that borrowing for longer-term operations will take the normal form of mudaraba.
The interest-free bank’s activities
From the general regulation of the relationship between the bank, the depositors and the borrowers, Sadr moves to the second part of his thesis, which discusses various financial transactions of the interest-free bank permitted under the shari’a.
A: Deposits, loans, and the compensation theory
In traditional banks, one finds, says Sadr, three types of accounts for customers, which correspond to two kinds of deposits: current accounts (hisab jari) corresponding to imperfect deposits, which are deposits under immediate demand (wad’e’ naqisa, tahta at-talab); deposit accounts (iddikhar);
and saving accounts (tawfir). The latter two correspond to perfect (or complete) deposits, which are time deposits.
In Islamic banking, such a concept of deposit is unknown. In its stead, all the monies deposited in the bank are considered’ loans always due or due at a particular moment’ (qurud mustahaqqat al-wafa’ awfi ajal muhaddad) (IFB 84).
The legal concepts which underlie transactions carried out by Islamic banks and by traditional banks are different, even though the practice may indicate that Islamic banks take the same position vis-a-vis deposits under immediate demand. Islamic banks consider these deposits as loans by the depositors to the bank. Such deposits yield no interest.
In the West, adds Sadr, the deposit in the current account has slowly developed from a contract of compensation (muqassa) that was first decided by the courts, then was increasingly adopted as an autonomous transaction.
The current account was therefore a’contract between the bank and the depositor (‘amil), in which the personal [subjective] rights lose their personalisation’ (sic, IFB 86). Slowly, these rights are lost in the developing contract, and the idea of compensation between the rights of the bank -as a substitute to the borrower taking a loan from the bank -recede in proportion to the degree of autonomy achieved by the’current account’ contract.
Under Islamic law in contrast, the theory of virtual compensation that at one time underlay the early banking system of the West is not necessary.
‘Then there is no need for current accounts. The virtuality of the subjective personality of the rights vanishing in vis-d-vis [because of the compensation theory] (dhawaban al-fardiyya adh-dhatiyya lil-huquq al-mutaqabila)’, makes it feasible for a nominate contract, the mudaraba, to emerge. If one considers the borrower’s withdrawal of funds from the bank as the expression of a loan from the bank in return for him lending to the bank (i.e. when he deposited his money in the account), it follows that two obligations are’in vis-d-vis’ (mutaqabila), and mandatory compensation, muqassa jabriyya, takes place without the necessity for any transaction or for a formal agreement between the bank and the lamel, the agent (borrower-depositor).
This mandatory compensation is accepted by most jurists in the shari’a, particularly, adds Sadr, the Hanafis and the Imamis. In their writings, the muqassa jabriyya has also been known as tahatur (IFB 87).
B: The cheque as transaction
There are in Sadr’s theory, two ways to explain the cheque as a legal operation when the drawer of the cheque has a creditor account in the bank.
The first possibility is the concept of istifa’.
In the theory of istifa’ the cheque is considered as’ a bill of exchange-assignment
from the debtor to his creditor, drawn on the bank where the debtor (drawer) owns his mobile deposits (wada’e1 mutaharrika)’ (IFB 93). This operation of istifa’ is legal.
If, on the other hand, the operation of the cheque is considered a new loan from the bank on which the cheque is drawn, whereby two obligations are created, the Islamic rules on lending must be respected.’ It is not possible to draw on the [bank] account by way of cheques, if they are considered as loans, unless the drawer, the bank employee or the drawee themselves receive (qabadd) the amount drawn... The reception (qabd) by the debtor [i.e the cheque drawer] or his agent-proxy [i.e. the bank employee or the creditor] is considered a basic condition for the validity of the loan under Islamic law’ (IFB 93)-
It follows, concludes Sadr, that in order to avoid the necessity to perform the act of receiving the money required by the cheque theory as combination of loans, it is preferable to resort to the first, and simpler theory, legitimating the transactions on cheques of interest-free banking through the theory of istifa’.
These two theories presuppose that the drawer has a positive credit account with the bank. In the situation in which the drawer does not have enough funds to cover such a cheque, a problem arises. Where the theory underlying the transaction is based on the concept of loan, the formal conditions necessary for the loan must be present. However, the assignment (hawala) theory is more convenient in this case,’for the assignee is not a debtor of the assignor, and the jurists agree on this [i.e on this way to legitimise the transaction] as hawala ialal-bari’ assignment to the third party,
and I consider it a correct assignment which can be executed by acceptance from the bank’ (IFB 94).
In this situation, there are liabilities which the accepting bank charges the cheque drawer for, such as’postage fees, periodical fees for checking on accounts These are all valid’ (IFB 95).
C: Theory of deposits
In the first part of al-Bank al-la Ribawi, Sadr had addressed the question of deposits from the point of view of the relationship between the bank, the depositor and the borrower. Here the emphasis is on the legal theory of deposits as he derives it from the shari’a.
Deposits in traditional banks operate as interest-bearing funds. As such, they are unacceptable for Islamic banking, which ought to reconvert them into legally admitted operations such as mudaraba.
(a) Savings Deposits, zvada’e’ at-tawfir. These deposits are understood to be’accounts in a register (daftar) which must be produced every time a deposit or a withdrawal is undertaken’. Like fixed deposits, they should operate in an Islamic bank on the basis of mudaraba.
There are two important differences in the regime of savings deposits in an interest-free bank: (1) The saver should be allowed to withdraw his money at will, whereas fixed deposits must remain with the bank for a term of no less than six months; (2) The Islamic bank can reserve a percentage of the savings deposit to be considered as a loan, and kept as fiduciary money which will not go into exploitation (IFB 97).
(b) Real Deposits, al-zvada’e1 al-haqiqiyya. These funds, which the depositor keeps with the bank for safety and storage, do not differ in any way from their regime under traditional banking. A fee on the keeping of real deposits is valid.
The economic role of bank deposits, says Sadr, has traditionally been threefold:
(1) Deposits are a means of multiplying funds, through’the strong guarantees deriving from the element of trust in banks. Thus, the means of payment [i.e. circulation] expand in the commercial and economic ambits’ (IFB 98-9).
(2) Deposits represent monies that were, until kept with the banks, economically idle. By joining the economic markets, these deposits contribute to the activation (inlash) of the country’s economy, and of its industrial and economic growth.
(3) Deposits contribute to an increased fiduciary relationship (Vtimari)
and have an inherent capacity to multiply through business.
These three points are discussed in turn by Sadr from the point of view of the shari’a.
(1) As a means of payment, through the issuance of cheques, deposits become’debts towards the depositors with the bank’ (IFB 100). But as for all debts, they are bound by two prescriptions of the law.
One debt can be used to offset another debt by way of transfer (hawala) and the cheque can be used as a means of payment, i.e. as a tool of debt redemption (adat wafa’).
The debt can be used’as the means of payment in which the contract vests immediately, as when the creditor buys with the debt he has with the debtor some merchandise, or when he donates this debt to another person’ (IFB 100).
Under Islamic law, the last alternative can be accepted only if certain conditions are fulfilled: (i) As long as the merchandise purchased is not a future (mu’ajjal) commodity, for in that case, debt would be bought against debt, and such a transaction is prohibited; (2) If the creditor donates his debt to another person, the donee can only be the debtor himself. Otherwise the donation is considered null, for’the reception by the donee of the money donated is a condition of validity in the donation’ (IFB 100).
In conclusion, Sadr suggests excluding the complications of the second theory, and simply retaining the first one. Cheques should be seen as means of payment used as tools of redemption. Under this legal theory, they are valid under the shari’a.
(2) Sadr sees no problem with the second view of deposits as a way to accumulate capital for economic use. But the traditional theory is acceptable only if the utilisation of the monies is achieved by way of the mudaraba.
(3) The theory of creation by deposits of a more extensive fiduciary circulation (i’timan) in banking prompts the following legal question:
‘ Is it possible for the Islamic bank to create Vtiman, and therefore a larger state of indebtedness than the amount of deposits kept in its possession?’(IFB 102).
Three hypotheses (IFB 102-5) are used to illustrate the problem, and the way Sadr views its accordance with the law:
(a) The bank has 1,000 dinars on deposit. Two prospective borrowers come for a loan each, and the bank commits itself (yahazim), knowing that the two borrowers would be depositing the money borrowed from it, and that they would not withdraw it at the same time.
(b) The bank has 1,000 dinars on deposit. One prospective borrower gets a loan of 1,000 dinars from the bank, and pays it to his creditor, who in turn deposits the money with the bank. Another borrower appears who gets a 1,000 dinars loan from the bank. The bank will have, again, lent 2,000 dinars when it only had 1,000 in its coffers.
(c) The bank has 1,000 dinars on deposit. Two drafts are written on the bank, 1,000 dinars each, by persons who have no account with the bank. The bank accepts both drafts as loans and receives interest on them, even though it has only 1,000 dinars on deposit, because the creditors of the two drawers will not, in the bank’s calculation, withdraw their monies simultaneously.
These three hypotheses, which illustrate the ability of the bank to capitalise on its deposits, are used by Sadr to show how current banking transactions may or may not be acceptable to the law.
Cases (b) and (c) offer an example of the validity of modern transactions in the light of the shari’a. Case (b) is, for Sadr, constituted by two separate loans, in which the receipt (tasallum) of money is immediate. Both loans are therefore valid.
In case (c), the bank’s indebtedness stems from its acceptance of the two drafts as guarantee of the loan transaction. The bank will be duly considered a creditor for 2,000 dinars to the drafters and a debtor for 2,000 dinars to the draftees.
In both cases, the legal cause exists and is valid. In case (b), the receipt (qabd) by the borrower of the money lent is the underlying legal cause. In case (c), the cause is the acceptance of the draft by the bank.
In case (a), however, Sadr does not seem to find sufficient legal grounding to legitimise the bank’s loans to the borrowers. The problem in the legal theory resides in that the bank merely promises to secure the loan of 1,000 dinars for each prospective borrower, at a time when it does not possess the money in its safes. This engagement, or promise to lend (iltizam), is not acceptable under Islamic law, because’the element of receipt (qabd), which is necessary by law for the loan’, is absent from the transaction.
There follows an important precision. In case (a), Sadr suggests that the transaction is void because the formal act of receipt has not taken place. But this’ receipt’ does not mean that the money lent should actually be severed definitively from the lender, the bank, and enter the formal possession of the borrower. The borrower could take the money and deposit it in his current account with the bank. But would that not constitute the elements that define mandatory compensation (muqassajabriyya) which was earlier depicted as an obligatory mechanism operating inevitably when two obligations are in visa-vis ? In this case, would that automatic operation not undermine the whole transaction by voiding automatically both loans -the loan from the bank to the borrowers, and the loan from the borrower-depositor to the bank?
The answer is no. There is in this case no compensation, because the two loans have fundamentally different terms. The borrower in the first loan has contracted an obligation that has a more or less long term. But when the borrower turned depositor opens a current account with the loan just received, no time terms are attached to the transaction, and the mandatory compensation does not operate.
D: Other transactions
Al-Bank al-la Ribawi devotes a long section to a number of current financial transactions that are traditionally performed in a banking system. These transactions are discussed by Sadr, again, from the point of view of their conformity with the shari’a precepts. These transactions are divided into three categories.
First category: Services to customers
The first category is related to the services that the bank renders to its customers, and the interest-commission that it culls for its services. The basic question which determines whether this or that service is valid depends on a number of variables, which are then methodically discussed.
Under the heading’the first part of the bank’s activities’ (IFB 106-52), a long section is devoted to various services in modern banking, which are also discussed in some detail with a view to their conformity with the policy of an interest-free bank.
There are several such services, which Sadr lists as’the collection of cheques, the collection of drafts, the documentary collection, the acceptance of cheques, and drafts’ (IFB 106). The guiding thesis for the enquiry into all these transactions is derived from the question posed about the cheque:’ Can the bank, from a legal point of view, receive a fee,’umula, ujra, on the collection of a cheque?’ (IFB 108).
Many sections and subsections are devoted to these banking operations.
For the purpose of our analysis however, only some of Sadr’s most significant analyses will be presented.
Cheques. Sadr had already addressed the legality of cheques viewed as transactions between parties through the bank. He offered two juristic justifications (the theory of istifa’ and the theory of loan combination), and suggested that the first theory was more encompassing and simpler. Here the issue is the validity of charging a fee for the role of the bank in the clearing operation.
Sadr is aware that in practice, a bank will not generally take a fee on its clients’ drawing a cheque, except in some cases where the transaction is international and involves services abroad (IFB io8n.). But he is none the less interested in the validity of the principle of charging a fee from the point of view of Islamic jurisprudence.
Sadr examines two legal arguments bearing on the operation. It is, he writes, either a matter of a single or double transfer, or a transfer combined with a sale. The transaction is a single transfer if the cheque is drawn in the same place and by the same bank where it will be collected by the beneficiarydrawee, i.e. by the creditor whose debt is requited by the cheque. But the transaction would be a double transfer if a different bank is involved. In this case, there is a transfer from the drawer of the cheque on the bank where the cheque is drawn, but the collector of the cheque deals with a different bank, which credits the amount of the cheque on its accounts with the first bank.
This means, adds Sadr, that the first bank has passed the cheque of the drawer onto the second bank. The collection will have been constituted by two successive transfers.
But the cheque can also be conceived as an operation combining a transfer and a sale. The drawer endorses the cheque for the benefit of the drawee through the bank, and the drawee becomes the owner of the value of the cheque. Then the sales transaction operates when the drawer-owner sells the share he possesses with the bank, and this will be a sale of debt.
Whether the first or the second justifications are adopted, Sadr continues, the operation of the cheque is valid under Islamic law. However, in terms of the fee collected on the drawing of a cheque, it is acceptable in Sadr’s opinion only if the cheque is drawn on a bank other than the clearing bank, or if the clearing bank does not hold an account for the creditor-drawee. If the bank does hold an account for the drawee, the bank can charge a fee only if there is a pre-existing agreement to that effect with its creditors. The distinction here is rooted in the fact that the operation in the latter case will transfer the property of the debt only with the formal acceptance of the substituted debtor, the bank (IFB 109).
There remains that if the bank has branches in different locations in the same country, such as Baghdad and Mosul, it can ask for a fee for drawing the cheque in a place other than where the drawer has deposited his account.
Other activities: underwriting, transfers, etc. Alongside cheques, Sadr discusses several other activities carried out by banks, such as transfers, especially when they involve significant distances, and considers the imposition of fees on these operations to be legal. The bank can also charge fees when underwriting newly formed companies, emitting shares, keeping financial letters, guaranteeing credit and documentary papers, storing merchandise, etc. All these activities are generally considered to be legal, and one finds little dissimilarity between the way they are carried out by traditional banks and the way they ought to be performed by an Islamic institution.
There is, however, in the discussion of the charging of fees in collecting drafts, an instance where Sadr insists on preventing the imposition of fees by the Islamic bank, unless the bank can justify the fee by proper legal consideration for the service against which the fee is rendered.
The bank is entitled, says Sadr, to charge a fee on a draft that it collects for the benefit of its customers,’whether the collection takes place by receiving the money in cash, or by transferring the value of the draft from the creditor account of the draft’s drawer in the bank to the debtor account of the beneficiary. This transfer is but an assignment by the drawer of the draft of his debtor on the bank’ (IFB 120).
There is, however, a difference between a situation in which the drawee comes to the bank with a draft which was not initially drawn on the bank, and asks the bank then to collect it, and a situation in which the drawee comes to the bank with a draft on the bank by his creditor.
In the first case, the bank can charge a fee in return for getting in touch with the debtor and asking him for an execution that will be completed either by delivering the money in cash or by transferring the money into the account. In the second situation, however, the bank becomes by way of the transfer to its order of the drawer of the draft, indebted to the beneficiary (mustafid) with the value of the draft, without need for the beneficiary’s consent; for the drawer has a creditor account in the bank and the transfer from the creditor to his debtor is executed without need for the debtor’s consent. When the bank becomes the debtor, there is no justification for its charging a fee on the remittance of its own debt. It therefore appears that the collecting of the draft can allow the bank to charge a fee if the draft is not endorsed onto the bank (IFB I2O-I).
Foreign currency, gold and bank fees. A more significant difference between conventional and Islamic banking, at least in the legal theory underlying these activities, relates in Sadr’s opinion to the regime of currency in the operations of change.
‘The rules on change vary in Islamic law according to the nature of the currency used’ (IFB 146). As long as the currency involved is paper money, the basis on which this paper money is created determines the way the law will ultimately govern operations with and in that currency.
In the case of gold and silver, the classical jurists have generally allowed, writes Sadr, transacting with them on two conditions: the equivalence in quantity between the price and the commodity when both are made of gold or silver; and the complete and immediate execution of the transaction at the place of contract (fi majlis al-’aqd).
Sadr disputes this division, and contends that in fact, only one condition is required in transactions involving gold and silver. Equivalence is necessary, but the exchange should not be instantaneous. The second condition, immediate completion of the transaction,’is required for the exchange of gold against silver, or silver against gold. When gold is traded against gold, or silver against silver, the exchange (taqabud) is not necessary at the place of contract. The sale is valid regardless’ (IFB 147-8). Sadr argues that in the case of an exchange of gold for gold, the condition of equivalence is the only one stated in the hadith. There is therefore no need to add another condition. Furthermore, since an increase in the exchange, i.e. the purchase of more gold for less gold, is prohibited riba, an equivalent exchange is sufficient to secure a valid transaction. The formal exchange can be completed in a place other than the place of contract without prejudice to the validity of the transaction.
Finally, the purchase and sale of foreign currency should be allowed for the bank, and the profit made over such transaction is valid. Similarly, a merchant can ask his bank for a fee, to guarantee that the price for a merchandise in foreign currency does not increase in case of devaluation, and that his present payment in the local currency will be adequate for the time of delivery of the merchandise.
This is valid also from the legal point of view as long as the price for which the bank has purchased the foreign currency to be used on term (ajila) is not itself a future sale (mu’ajjal) in the same contract of purchase. If it were, the transaction would be a sale of a debt against a debt, and this is legally void. If the price is to be agreed on in the future, an agreement can be passed outside the purchase contract. (IFB 139)
Second category: loans and facilities
The second category is represented by’loans and facilities’ that the bank offers. Into this section fall three major activities: (1) The loans proper; (2) Commercial papers, and related operations of discount; and (3) Letters of credit (IFB 153-5).
Loans proper. Loans generically understood also encompass other banking services which might end up being loans. The basic analysis of loans by the shari’a must be’developed into a general policy’ which will avoid riba. This policy, following the presentation of the first part of the book, is summed up along the following guidelines:
First: The transformation of loans and advances (taslifat) into mudaraba transactions.
Second: When mudaraba is not possible, lending must be done according to the rules presented earlier.
Third: Conditional upon the acceptance of a loan project should be for the borrower’the payment of a fair fee (ujrat al-mitht) in return for the [underwriting of the loan’ (IFB 155).
Fourth: The payment of the remainder of the interest fee (fa’ida) at the time of settlement.
Fifth: If the borrower pays this fee as a grant (donation, hubwa) to the bank, he could be considered as a first-class client, and be privileged in later loans over other borrowers who treated the fee as loan and not as hubwa.
The discounting of commercial papers. Such discount operations could be perceived as another form of riba, says Sadr, since the discount operates for the bank as an increase of the value of the paper discounted in return for a longer term granted to the seller of the paper.
However, the discount can avoid being riba, as long as the fee for the bank can be construed as a service rendered for’ receiving the money that is paid elsewhere’ (IFB 156-7).
This may not be enough incentive for the bank that has substituted itself to the beneficiary of the discount.
Between the bank and the drawer (muharrir) of the commercial paper (al-kimbiyala)’ no contract arises that sets any terms between them... Therefore I see the necessity to develop the discount operation from a legal point of view. In other examples, the discount operation was constituted by three elements: the loan, the assignment (hawala), and the engagement (ta’ahhud) [i.e. here in contrast, legitimisation does not apply, since these elements are absent from the relationship between the drawer and the bank]. The operation could [on the other hand] be construed on a different basis, as a loan which consists of the amount that the beneficiary [drawee] receives at the time of the discount, and an agency by this beneficiary to the drawer at the time of the paper’s realisation. The drawer of the paper will remain the debtor of the beneficiary, not the debtor of the bank, and the bank is the creditor of the beneficiary and [operates as the beneficiary’s] agent for the realisation of the value of the paper when it becomes due. (IFB 158)
There is another legal justification of the discount operation, based upon the theory of sales. Some jurists accept it on the basis of the legality of the sales of a loan, if the loan is not in gold or silver or some other weighable commodity. However, Sadr does not seem to support this theory,’on the basis of some reports (riwayat) which show that when the creditor sells his debt for a smaller amount, the buyer can receive from the debtor only the amount he paid to the buyer. The remainder is considered to have been automatically suppressed’ (IFB 159).
Letters of credit, (khitabat al-i’timad). After he explains the general mechanisms of letters of credit, Sadr explains that the fee (lumula) charged on issuing and clearing the operations entailed is valid and legally acceptable.
The’umula, to which the Islamic bank is entitled when issuing a letter of credit, is justified legally in one of three ways:
The bank is considered the debtor of the bearer of the letter, and is entitled to a fee whenever the letter is cleared in another location.
If the letter of credit is a loan of the bank to the bearer, a fee can be charged if the letter is cleared elsewhere. The fee is a compensation for the bearer of the letter receiving the value of the loan in a different location. This fee would be further validated if the value of the letter is paid in foreign currency, which entails extra expenses for the bank.
If, finally, the letter of credit is considered as a delegation (tafwid) to the bearer to receive the value of the letter in a foreign currency, the bank can ask’for a fee as aju’ala on the delegation’ (IFB 146, 247-8).
Third category: purchase of commercial papers
The third category of transactions is constituted by what Sadr classifies as’exploitation, istithmar’ (IFB 161-3). Exploitation means’the investment by a bank of part of its own monies, or of monies deposited with it in the purchase of commercial papers’. The norms of practice with these papers in traditional banking is’from the jurisprudential point of view no different from any other person who buys and sells these papers’ (IFB 161).
The trade of commercial papers by the bank is legally justifiable in two ways:
As a loan: the party that emits the obligation at a value of 1,000 dinars and sells it at 950 is in fact taking a loan from the purchaser of the obligation, with the understanding that the seller will pay back the buyer’s obligation with a 50 dinar surplus at the end of the year.
As a sale: the party emitting the obligation at 1,000 dinars is in fact selling it for 1,000 under a year-term against 950 payable immediately. This, however, is only’ an artificial cover, taghtiya lafziyya’ for an operation which ought to be described as a loan.
Whatever justification, however,’the difference between the nominal value of the obligation and the real value paid by the bank is riba’ (IFB 163).
The bank can only indulge in such activity if the obligations have been issued by the government, or by a private party according to the rules laid out in the first part of the book.’Outside these limits, the bank cannot buy and sell obligations’ (IFB 163).
Banks in an Islamic environment
Iqtisaduna and al-Bank al-la Ribawi were set, as indicated earlier, against very different social and financial backgrounds. Iqtisaduna insisted on the role of the state in the economy, as well as on the necessity to establish’ social justice’. The Islamic rules of riba were then part of the tempering role of an interventionist state. In 1969, the issue had shifted to the periphery, and the new work on banking was meant to introduce an Islamic order within a capitalist environment. Ten years later, when the Islamic revolution was on the agenda of both Iran and Iraq, another dimension of Islamic banking resurfaced. In the series on’ Islam guiding life’,
Muhammad Baqer as-Sadr wrote a booklet on the principles of a bank that would function without riba within an Islamic economy. This essay was an attempt to sketch the background for a banking system in a state that has succeeded in establishing itself in the wake of an Islamic revolution. As in his essays on Khilafat al-Insan and Lamha Fiqhiyya,
Iran, and potentially Iraq, were the evident target of his work.
Sadr refers briefly to his earlier work on banking, on the occasion of a remembrance of the remarks of’ a Muslim person -who, in the deviations of our Muslim world, was appointed minister in his country -who told me personally in all simplicity and innocence that he was as disconcerted by the name of a non-ribawi bank as he would be on hearing someone speaking of a square circle’.
Al-Usus al-’Amma lil-Bank fil-Mujtama1 al-Islami was meant as an introduction to a more comprehensive work (Usus 24), and the separate first edition of the pamphlet bore the notice’part one’. The’details’ promised were probably never written, but the Usus gives a good picture of Sadr’s approach to the problem of Islamic state banking. There is little by way of comparison with the minute analysis of al-Bank al-la Ribawi, and the exact formulae for the operations of the bank in a favourable Islamic environment are not spelled out. But the general philosophy of the system is.
The contrast was, not surprisingly for the populist background of the Iranian revolution, with the capitalist system. As in Iqtisaduna, the bank was one element in’ a comprehensive Islamic system with intertwined parts, and the application in each part prepares the ground for the success of the other part and helps in turn the projected Islamic role’ (Usus 13).
Under Capitalism, says Sadr, the role of the banks can be divided into two:
an objective role, which is the mobilisation of funds for industrial and commercial ventures, and a subjective role, which is the concentration of capital in the hands of the few who control the economy, and who will use this capital to reproduce and reinforce the system.
The bank in an Islamic environment shares with Capitalism the objective role of fund mobilisation. But it is evident that the subjective role is completely different. The essential contrast is based on the primacy of labour in the creation of wealth in the Islamic system, and the role of risk.
In Capitalism, the banks allow the capitalist’fixed earnings which are separate not only from the concept of labour but also from risk’ (Usus 10). In the Islamic system, both concepts are central to the financial setting.
This is where the role of the state, which was completely absent from the essay on the Islamic bank in 1969, is so important. The state, through its responsibility towards social justice and help of the downtrodden and poor,
will use the means at its disposal in the mantaqat al-faragh (discretionary area) (Usus 17) to prevent hoarding, establish zakat on non-productive funds, and encourage free loans to the needy (Usus 15-18). These are matters of public policy which are consonant with the role of the state as regulator of the distribution of wealth.
From the narrower financial point of view, banking will take two forms.
The bank will naturally welcome deposits, and the first form of the use of the funds deposited will be a’guaranteed loan’ (qard madman) to the depositor, who becomes the creditor of the bank with restricted rights. The depositor will be able to withdraw his deposits at will. He could earmark them for specific philanthropic projects towards the poor, and the bank would open a special account for the purpose. Most importantly in Sadr’s remarks, the depositor should be able to conserve the’real value’ (qima haqiqiyya) of his money, and have it protected from inflation:’ That the bank pays upon restitution what represents the value [of the deposits] does not constitute riba. The real value is calculated on the basis of gold and the price of gold exchange’ (Usus 19).
The second form of banking is based on mudaraba. If the mudaraba is carried out directly by the bank undertaking an economic project, the profit will be split with the depositor on the pre-agreed basis of the mudaraba contract. If the bank merely plays an intermediary role, the mudaraba will be between the depositor and the borrower, and the bank will simply charge a fee Cumula) on its intermediation. But then,’the depositor will not be guaranteed his money back’ (Usus 20). The rejection of any guarantee appears to be at odds with the bank’s guarantee to its fixed-term depositors in the scheme defended in al-Bank al-la Ribawi. It is not clear whether Sadr has overlooked the contradiction between the rules presented in the two texts, or whether he considered that such guarantee would only function in a non-Islamic environment where conventional banks are competing with interest-free institutions.
The system portrayed by Sadr does not otherwise significantly differ from the scheme presented in his 1969 work. One important difference appears, however, in the overall control of the banks in an Islamic system. In 1969, the underlying principle was the banks’ independence from the adverse non-Islamic state. In 1979, the picture was quite different:’The operation of mobilising funds and exploiting them is undertaken in the Islamic society by the state through an official bank. Banking operations (istithmarat masrafiyya) in the private sector are not permitted’ (Usus 15). The dirigiste measures were thus consecrated.
Conclusion: new financial horizons for the sharfa
When, in the late 1960s, Muhammad Baqer as-Sadr set out to write a treatise on an interest-free bank in answer to a query by the Kuwaiti Ministry of azuqaf, the territory had remained uncharted but for the debate on riba in Egypt.
Interest-free transactions in the banking system, as well as the rejection of riba in the simplest transactions ruled by Islamic law, were destined to remain an important concern for the search of an Islamic alternative by way of the shari’a.
Two significant practical developments ensued. In the first place, a number of Islamic banks were established, especially since the mid-1970s.
Secondly, some Muslim countries have started examining the possibility of replacing their whole banking system by interest-free institutions. Yet again, the shari’a must adapt.
The gulf between theory and practice remains significant, but it would be difficult for institutions and countries which are concerned either with the civil legislation or the establishment of Islamic financial’money-houses’ to ignore the contributions of the jurists to the field.
Epilogue: the economics of lawyers and historians
It may appear strange that the parallels with Sadr’s work are mostly to be found in the writings of modern historians. The convergence can be explained by the heavy recourse, both for the’ulama and the historians, to the testimony of classical fiqh. Economic historians of the world of Islam,
and scholars who have more specifically written on its systems of credit and finance,
have questioned legal treatises for what they could express on the economics of the Islamic classical age. Similarly, the’ulama had to turn for their economic theories to the closest materials offered by the tradition. The Qur’an and the hadith could be telescoped to offer prescriptions for the economic model, but the injunctions drawn from these early sources were doubly flawed for an economic use: they were essentially of an injunctive moral nature, and they were not specific enough.
Alternatively, there had built up a body of Khalduniana, which took the Muqaddima’s economic hints as the basis for investigation. But with all the brilliant remarks of the Muqaddima, Ibn Khaldun remains primarily a historian. For the legal scholars in search of sources to complement the Qur’anic and hadith injunctions, vast riches had to be uncovered from their own background, the pure shari’a background. Early legal texts are extremely difficult to question. The efforts needed a systematic and highly synthetical mind, who could make concepts of modern economics drawn from Western tradition fuse with early abstruse non-economic material.
The parallel between economic historians and Sadr must however not be overemphasised. Unlike the work of historians, the efforts of contemporary jurists must be oriented to be made proficient, not merely descriptive. What the economic historian looks for in his reading of a legal treatise is confined by the method to reflecting the state of the economic situation at a given and limited time in history and for the role and working of credit institutions.
When reading the same legal treatise, the modern’alim seeks proficient arguments for immediate use in the system he tries to sketch as an answer to contemporary challenge. The material drawn from the text cannot be merely descriptive or explanatory, it must be able to perform in practice, whether in the state or in a bank. It comes then as no surprise that the task has proved complex and difficult.
The methodological hurdles of the contemporary economist in search of a synchronic Islamic theory of economics and banking (as opposed to the diachronic work of the historian) can be summed up as a pyramid of constraints.
There is no tradition of economics in Islam. Other texts of the turath (the classical tradition) must be questioned’economically’. The operation is perforce highly selective, and the criticism of Sadr by some Sunni scholars described his operation of ijtihad correctly. But it is this particular imaginative effort which makes for Sadr’s originality. The logic of the original text had to be dismantled for the sake of the new discipline.
Nor can the texts exploited be restricted to the Qur’an and Sunna. There is not enough material in the two sacred sources for an economic theory. The investigation must extend to the much richer resources offered by legal texts.
The seriousness of’Islamic economics’ can only come from the rich and unique tradition of Islamic law. This is the only tradition which can offer conceptual tools which are properly’Islamic’. If the contemporary Islamic scholar delves into sophisticated economic models without the prerequisite of the classical legal apprenticeship, the Islamic specificity of the model loses its sole intellectually systematic basis.
This creates a problem of expertise. Legal texts are obscure for nonlawyers.
Only a jurist abreast of the legal methods and terminology can feel at relative ease in classical legal treatises. Furthermore, the performance required by the legal text is not historical. It is not directed towards understanding the past, however glorious. It is prospective, and deals with a’programme’. The question of’what happened?’ must be supplemented with the question’ what to do ?’ To that prospective concern, is added the problem of terminology. The language of the discipline of’economics’ is moulded in capitalist and/or socialist categories. The Islamic economist must write his text with a language which is still in the formative process, and the attempt at being different is encumbered by terms-of-art which are alien to his or her tradition.
All these combinations require the fusing of several specialities. The Islamic economist needs proficiency in classical legal texts, a practical and performing methodology, synthesis to bring about a comprehensive system, and innovation with the terminology. No wonder that few scholars have been able to meet all the requirements, and Islamic economics is still at an early formative stage. This explains why a phenomenon like Muhammad Baqer as-Sadr is so noteworthy. He was the only scholar able to produce a comprehensive text which could draw on the’ economic’ texts of the classical fiqh treatises as well as on the sources of Marxist and capitalist traditions available in Arabic, and surmount that pyramid of constraints with some measure of success.
It remains that Sadr was neither an economist nor a banker. Evident mistakes will be found by those who peruse his system with the tools of modern economic and financial theories.
Muhammad Baqer as-Sadr’s contribution is none the less remarkable.
How and why Sadr differs in this respect can be perhaps sought in the ways he has overcome two basic hurdles.
The first hurdle can be generally described in terms of sources. The most interesting side of Sadr’s research appears in his emphasis on fiqh. In the absence of a discipline of economics in classical Islam, the complexities and riches of the shari’a as elaborated in the works of the jurists, and not as a direct extrapolation from a hadith or a Qur’anic verse, render Sadr’s exercise different from most of the other endeavours in the field.
The second essential hurdle can be detected in the method. When Sadr writes that Islamic economics is not a science, he weakens perhaps some of the’ legitimacy’ of the field, but he does not set as a goal an impossible Holy Grail of truth for a nascent and uncertain discipline.
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Author: CHIBLI MALLAT
