Sunday, July 22, 2012

Allah's Guidance on Commerce

Although Allah places primacy on prayer, Allah also understands the need to trade and conduct commerce:
Believers! When the call to prayer is made on the day of congregation, hurry towards the reminder of God and leave off your trading—that is better for you, if only you knew— then when the prayer has ended, disperse in the land and seek out God’s bounty. Remember God often so that you may prosper. Quran 62:9-10
Its noteworthy that the prophet was a trader prior to receiving revelations. Perhaps that is why Allah reinforces the numerous verses which call for honoring pledges to one another with a command to accurately record contracts:

You who believe, when you contract a debt for a stated term, put it down in writing: have a scribe write it down justly between you. No scribe should refuse to write: let him write as God has taught him, let the debtor dictate, and let him fear God, his Lord, and not diminish [the debt] at all. If the debtor is feeble-minded, weak, or unable to dictate, then let his guardian dictate justly. Call in two men as witnesses. If two men are not there, then call one man and two women out of those you approve as witnesses, so that if one of the two women should forget the other can remind her. Let the witnesses not refuse when they are summoned. Do not disdain to write the debt down, be it small or large, along with the time it falls due: this way is more equitable in God’s eyes, more reliable as testimony, and more likely to prevent doubts arising between you. But if the merchandise is there and you hand it over, there is no blame on you if you do not write it down. Have witnesses present whenever you trade with one another, and let no harm be done to either scribe or witness, for if you did cause them harm, it would be a crime on your part. Be mindful of God, and He will teach you: He has full knowledge of everything. If you are on a journey, and cannot find a scribe, something should be handed over as security, but if you decide to trust one another, then let the one who is trusted fulfil his trust; let him be mindful of God, his Lord. Do not conceal evidence: anyone who does so has a sinful heart, and God is fully aware of everything you do. Quran 2:282-283
Although the verse outlines a very specific method for recording an obligation, the summary line is the key takeaway; "Do not disdain to write the debt down, be it small or large, along with the time it falls due: this way is more equitable in God’s eyes, more reliable as testimony, and more likely to prevent doubts arising between you." As with prayer, fasting, and diet, Allah provides flexibility around this process for extenuating circumstances such as the generic exemption of "but if you decide to trust one another, then let the one who is trusted fulfil his trust." Once again, Allah is stressing the principle over the ritual. God calls out the principles of mutual consent and justice in another verse:
You who believe, do not wrongfully consume each other’s wealth but trade by mutual consent. Do not kill each other, for God is merciful to you. If any of you does these things, out of hostility and injustice, We shall make him suffer Fire: that is easy for God. But if you avoid the great sins you have been forbidden, We shall wipe out your minor misdeeds and let you in through the entrance of honour. Do not covet what God has given to some of you more than others—men have the portion they have earned; and women the portion they have earned—you should rather ask God for some of His bounty: He has full knowledge of everything. Quran 4:29-32
Although Allah acknowledges wealth disparities in the above verse, he still urges Muslims to avoid exploitation of those less fortunate by banning usury (riba). God contrasts usury (riba) with charity, indicating that charity is strongly preferred:
Those who give, out of their own possessions, by night and by day, in private and in public, will have their reward with their Lord: no fear for them, nor will they grieve. But those who take usury will rise up on the Day of Resurrection like someone tormented by Satan’s touch. That is because they say, ‘Trade and usury are the same,' but God has allowed trade and forbidden usury. Whoever, on receiving God’s warning, stops taking usury may keep his past gains—God will be his judge—but whoever goes back to usury will be an inhabitant of the Fire, there to remain. God blights usury, but blesses charitable deeds with multiple increase: He does not love the ungrateful sinner. Those who believe, do good deeds, keep up the prayer, and pay the prescribed alms will have their reward with their Lord: no fear for them, nor will they grieve. You who believe, beware of God: give up any outstanding dues from usury, if you are true believers. If you do not, then be warned of war from God and His Messenger. Quran 2:274-279
In addition to condemning usury (riba), Allah discourages transactions that deplete the wealth of one party to increase the wealth of another.
So give their due to the near relative, the needy, and the wayfarer—that is best for those whose goal is God’s approval: these are the ones who will prosper. Whatever you lend out in usury to gain value through other people’s wealth will not increase in God’s eyes, but whatever you give in charity, in your desire for God’s approval, will earn multiple rewards. Quran 30:38-39
The verse does not ban wealth transferring transactions unless they are driven by usury (riba). Some scholars see the basis for a divine preference for partnership transactions where both parties share in risk and reward in this verse, and 4:29 "do not wrongfully consume each other’s wealth but trade by mutual consent." Allah provides clarification on his definition of the banned usury (riba) by proclaiming:
You who believe, do not consume usurious interest, doubled and redoubled. Be mindful of God so that you may prosper—Quran 3:130
You who believe, beware of God: give up any outstanding dues from usury, if you are true believers. If you do not, then be warned of war from God and His Messenger. You shall have your capital if you repent, and without suffering loss or causing others to suffer loss. If the debtor is in difficulty, then delay things until matters become easier for him; still, if you were to write it off as an act of charity, that would be better for you, if only you knew. Beware of a Day when you will be returned to God: every soul will be paid in full for what it has earned, and no one will be wronged. Quran 2:279-281
When Ahmed ibn Hanbal, the founder of the Hanbali school of Fiqh, was asked to define usury (riba), he stressed the exploitation of a creditor in financial distress beyond a mutually agreed repayment amount and term:
“The manifest riba about which there could be no ambiguity is this; that someone is indebted to another and the creditor asks the debtor whether he is ready to pay the debt or would alternatively agree to an increase in the principal loaned out to him.  If the debtor is not able to pay, then the creditor increases his principal as well as the term of repayment.” Quoted by Fazlur Rehman in 'Riba and Interest' 1963 pg 34
Hanbal's definition of usury (riba) does not attempt to restrict contracting for a debt between 2 mutually consenting adults, a practice clearly encouraged in 2:282-283, but the exploitation of someones financial difficulty after the original agreement is made. This definition is completely consistent with the earliest recorded traditions about Riba, attributed to Ata ibn Abi Rabah & Ikrimah ibn Abi-Jahl and subsequently repeated in multiple tafsir:
Regarding the word of God: “O believers! Fear God and forego what remains of al-riba”, ‘Ata and ‘Ikrimah said that it was revealed concerning al-‘Abbas ibn ‘Abd al-Muttalib and ‘Uthman bin ‘Affan who bought some dates (not yet harvested). When the time came for harvesting, the owner of the dates said to them: “If the two of you took what is owed to you, I would not have enough for my children. So would you take half and delay the delivery of the remaining half and I double it for you?” So they acted accordingly and when the agreed time came they asked for the increased amount. This reached the Messenger of God, so he prohibited them. Then God Most High sent down this ayah. So they heard and obeyed and took only the capital amount.
Fazlur Rehman, a prominent Pakistani theologian, specified the "doubling" mentioned in 3:130 to qualify as usury (riba) in the conclusion of his book 'Riba and Interest':
“Riba is an exorbitant increment whereby the capital sum is doubled several-fold, against a fixed extension of the term of payment of the debt.”
By Rahman's definition, usury (riba) is not only the extension of a previously agreed upon debt, but an extension that at least doubles the amount to be paid. Its important to note that both definitions are very focused on preventing exploitation of the debtor after the original contract expires, not on defining the terms of the original contract. The original contract qualifies as a pledge, which Allah repeatedly asks Muslims to honor when made. Contrary to popular misconception, there is no prohibition of the time value of money (bank interest) in any of the quoted verses.

Many scholars point at the dispute between the creditors of the recently converted tribe of Banu Thaqif and the debtors of the tribe of Banu Amr ibn al-Mughirah as the basis for the revelations banning usury (riba), specifically 2:278-279. Settling the dispute, the prophet forgave the usury (riba) component of the loans, while honoring the original loan amounts to be paid back. Some scholars try to use this anecdote to prohibit all time and risk costs (interest) in all transactions. It is noteworthy that the revealed verses refer to only the usury (riba) as unenforceable while historical accounts (seerah) stress the justice of the prophet's enforcement of the original loan contracts. When Allah gives the warning, "give up any outstanding dues from usury, if you are true believers. If you do not, then be warned of war from God and His Messenger," he is specifically warning about the nullification of the recent treaty with the tribe of Banu Thaqif which rejected their usury claims.The prohibition of the time and risk value of money (interest) is extremely hard to decipher from both this anecdote, or any other revealed verses.

When I engage in commercial transactions, I strictly adhere to the principles laid out by Allah. I only engage in transactions by mutual consent, preferably documented in writing with witnesses. I treat these contracts like pledges, and obey their terms. I try to structure my transactions so that both parties benefit if an investment turns out well, with both parties sharing some risk if they turn out poorly. If a trading partner undergoes distress, I do not exploit their weakness by imposing usury upon them to double their debts to me. As mentioned in previous posts, Allah requires regular prayer and encourages acts of charity. When profiting from commerce, I do my best to give a portion to charity.

Although much has been made about Islamic Finance in recent years, its noteworthy that the basis of the structures encouraged by Islamic Finance can only be traced to the 20th century. The Ottoman Empire freely engaged in modern finance, issuing bonds to finance large investments. Islamic Finance was first theorized in the 20th century by Muslim nationalists in Eqypt (Qutb) and Pakistan (Maududi), and then structured in the 1960s. Today their primary proponent is Nizam Muhammad Saleh Yaqubi who receives compensation from 78 banks to provide Shariah (religious) certifications for their practices under his authority. Professor Mahmoud El-Gamal, Islamic Economics Chair at Rice University, has written extensively to show that these schemes have no effective difference from conventional finance instruments.