Interest, Usury, Riba, and the Operational Costs of a Bank
by
A.L.M. Abdul Gafoor
This book traces the history of interest, its relation to usury and riba, the origins of dogmas and theories that prohibit or justify its practice, and the meaning of interest in the modern setting of banking. A general model of interest is presented in which several scenarios — from person-to-person lending to modern commercial bank lending — become sub-models. This helps one to understand the meaning of modern bank interests in relation to usury and riba. In turn, this enables one to separate riba from the operational costs of a bank and thus to devise a riba-free system of commercial banking that is both viable and compatible with the conventional one.
By looking at the needs of society,
three different kinds of needs are identified: investment and finance, banking
and loans, and charity. It is shown that
they each need be handled using a different technique. Moneylenders offered one solution for all
three needs because it was to their advantage, but the society has to cater for
larger concerns and therefore must offer more appropriate solutions. The Qur’an
points out these different needs and indicates different techniques to suit
each need. It is for today’s
Muslims to translate them into present-day “language” and set up
appropriate institutions. Outlines of
such institutions are also presented in this book. Articles elsewhere expand on these outlines.
Written lucidly in simple English, it
is suitable for reading by professionals and academics as well as by the
general public.
ISBN
90-8023548-2, xii+68 pages, 2005
Click here for Table of Contents
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Table of Contents
Preface ix
Chapter 1
Introduction 1
1.1 Lending and
borrowing: then and now 1
1.2 Lender,
borrower and the Church: different goals 3
1.3 Islamic
approach: different consequences 4
1.4 Lending
with and without interest 6
1.5 Need for
money 7
1.5.1 Extravaganza and vanity 8
1.5.2 Housing and education 8
1.5.3 War 9
1.5.4 Government expenditure 10
1.5.4.1 Government bonds 11
1.5.4.2
Treasury bills 11
1.6 Islamic
banking confusion 13
1.7 Solutions 14
Chapter 2
Interest, Usury, Riba, and the
Operational Costs of a Bank 16
2.1 Lending and
borrowing 16
2.2 Arguments
for and against interest 18
2.3 Usury and
interest 19
2.4 Theories of
interest 22
2.4.1 Opportunity cost of money 22
2.4.2 Time value of money 23
2.5 Bank
interests 24
2.6 The Islamic
position on interest 25
2.7 Riba 28
2.8 The cost of
borrowing 31
2.9 The courier
becomes a bank 34
2.10 The
operational costs of a bank 35
2.10.1 Current approaches 36
2.10.1.1 The
Iranian model 36
2.10.1.2 The
Pakistani model 37
2.10.1.3 The
Siddiqi model 37
2.10.2 Another approach 38
2.10.2.1
Interest 38
2.10.2.2
Services cost 39
2.10.2.3
Overheads cost 39
2.10.2.4 Profit
40
2.10.2.5 Risk
premium 40
2.10.2.6
Compensation for inflation 41
2.11 A general
theory of interest 41
2.11.1 Person-to-person lending 42
2.11.2 “Low interest” lending 43
2.11.2.1
Educational loans 43
2.11.2.2
Housing loans 45
2.11.3 Non-profit community lending 46
2.11.4 Bank interests 47
2.11.4.1
Deposit interest 47
2.11.4.2 Loan
interest 47
2.12
Conclusions 48
Chapter 3
Meeting the Financial Needs of Muslims:
A comprehensive scheme 49
3.1 Investment
and finance 51
3.1.1 Shareholder companies 53
3.1.2 Participatory financing 53
3.1.3 Mudaraba partnerships 54
3.2 Banking and
loans 54
3.2.1 Commercial (or retail) banking 54
3.2.2 Savings and loans at community level 57
3.2.3 Grameen bank 58
3.2.4 Private lending 59
3.3 Charity 60
3.3.1 Personal charity 61
3.3.2 Institutional charity 61
3.4 Conclusion 62
Bibliography 63
INDEX 65