We Don’t Go to Bars, Why Do We Go to Banks?

By Douglas Kelly

Part I | Part II

When I recently consolidated a student loan I had taken out many years ago, I noticed that the amount I owed was more than double what I had originally borrowed.  I’m still in school, so I don’t have double the education from when I first took out the loan.  I definitely don’t have double the income.  Even before I knew anything about Islam and how it forbids usury, I knew something was wrong with that picture.  And that there was a bigger picture involving a whole world in debt crisis.

I had a “eureka” moment when I first read the warnings in the Qur’an and Sunnah about usury.  The logical connection I made between those warnings and the global economic crisis can only be described in terms as simple as a children’s adventure story—lest they go right over all our heads like so many complex derivatives transactions and we as an Ummah fail to make the one simple transaction that might finally begin to change our condition in the world.

Like “putting two and two together,” it’s as if I had been walking around my entire life with the broken half of a ring inscribed with a secret message that couldn’t be read without the other half.  The first half of the message of that ring was my experience on Wall Street.  The missing half, the key to the secret, I finally found a generation later in the Word of Allah (subhana wa ta’ala – exalted is He) as revealed to the Prophet Muhammad ﷺ.

I am neither a scholar nor an Imam.  I only embraced Islam, and read the English translation of the meaning of the Qur’an for the first time four years ago.  I can only recite 13 surahs (chapters) from memory, and I am still both a student of the Islamic  financial  system and a student of the Deen of Allah (swt).  But 20 years ago I was an NASD-registered stockbroker with an investment banking firm known for its IPOs (Initial Public Offerings).  I have sold life insurance and annuities and bought investment properties.  And I had a front-row seat for an economic crisis that wiped out the value of a portfolio of prime real estate I took a decade to build, which in January 2006 appraised at 1.2 million US dollars.  I know first-hand how banks operate.  And it’s nothing like what the Prophet Muhammad ﷺ said that Allah (swt) prescribed for mankind.

The prohibition of interest and the laws of halal trade and lending that Allah (swt) revealed in the Hadith, as well as in the Qur’an itself, appear to me to describe a system of shared profit and loss between lenders and borrowers.  A system that looks a lot like what we know today as Investment Banking of common shares of stock.

The foundation of Wall Street, and every financial market on the planet, is the principle of risk is proportionate with reward.  Just like, “In God We Trust,” the very words “risk is proportionate with reward” imply a leap of faith.  The entire world does business according to this un-provable, unscientific law of sowing and reaping.  You cast thy bread upon the waters of commerce with the understanding that thy bread may never return; or that it may come back multiplied many times over—like a handful of loaves and fishes that end up feeding the multitudes.  The greater the chance of loss, the greater the potential profit.  The more you can afford to lose, the more you stand to gain.  Just like in life, nothing is guaranteed but death.

The first law of becoming a licensed securities broker in America is you may never tell a client, “I guarantee.”  Every piece of sales literature of every type of regulated investment product sold in the US must include the language, “Investing Involves Risk,” along with, in some cases, “…Including the Risk of Loss of Principal.”  The idea that an investor may lose his or her entire investment—or may profit handsomely—is what makes a market.

Stocks, as well as bonds, are considered staples of a diversified investment portfolio.  But while stocks represent a share in the profits and losses of a business enterprise, bonds are interest-bearing loans “guaranteed” by the borrower, or “guarantor.”  Bondholders are the first in line to receive the proceeds of a company in liquidation, while stockholders are the last in line and may receive nothing at all.

So who can guarantee a “guaranteed investment?”

During the time of the Prophet Muhammad ﷺ, most people were self-employed.  People raised crops or livestock,  fished the seas, made clothing or textiles by hand or transported the goods of others by ship or caravan.  They brought their produce or their hand-made goods to the marketplace to barter for other goods, or to sell for money.  Those blessed with an abundance of money could then finance the businesses of others.  Among the many societal wrongs the Prophet ﷺ was sent to  rectify was the deceitful way in which some businesses were being conducted—and the unfair way in which money was being leant.  We all know trade is halal and usury is haram, but do we know why?

Allah (swt) said in the Qur’an:

“Those who swallow down usury cannot arise except as one whom Shaitan has prostrated by (his) touch does rise.  That is because they say, trading is only like usury; and Allah has allowed trading and forbidden usury.  To whomsoever then the admonition has come from his Lord, then he desists, he shall have what has already passed, and his affair is in the hands of Allah; and whoever returns (to it)—these are the inmates of the fire; they shall abide in it.” (2:275)

“Allah does not bless usury, and He causes charitable deeds to prosper, and Allah does not love any ungrateful sinner.” (2:276)

“O you who believe! Be careful of (your duty to) Allah and relinquish what remains (due) from usury, if you are believers.”  (2:278)

“O you who believe! Do not devour usury, making it double and redouble, and be careful of (your duty to) Allah, that you may be successful.”  (3:130)

“And their taking usury, though indeed they were forbidden it, and their devouring the property of people falsely, and We have prepared for the unbelievers from among them a painful chastisement.”  (4:161)

The Prophet Muhammad ﷺ said:

“Gold is to be paid by gold, silver by silver, wheat by wheat, barley by barley, dates by dates and salt by salt, like for like, payment being made on the spot. If anyone gives more or asks for more, he has dealt in usury. The receiver and the giver are equally guilty.”  (Muslim)

“A time is coming to mankind when only the receiver of usury will remain and if he does not receive it, some of its dust will reach him.”  (Ahmad, Abu Dawud, Nasai, Ibn Majah).

“When a man makes a loan to another, he must not accept a present.” (Bukhari)

“A dirham which a man knowingly receives in usury is more serious (a crime) than thirty-six acts of fornication.”  (Ahmad, Daraqutni)

Here in the US, most people with incomes have a bank account or at least some relationship with a financial institution.  We cash our paychecks, pay our bills, save our money and finance our purchases through banks.  Banks that make most of their money off interest which, according to the Qur’an and Sunnah, is as haram as pork, alcohol, gambling and even fornication!

In his book An Introduction to Islamic Finance (2002), Justice Muhammad T. Usmani describes the difference between profit-based share investments (like stocks) and interest-bearing loans (like bonds):

“Interest predetermines a fixed rate of return on a loan advanced by the financier irrespective of the profit earned or loss suffered by the debtor, while [shares of stock] do not envisage a fixed rate of return.  Rather, the return [on shares of stock] is based on the actual profit earned by the [business].  The financier in an interest-bearing loan cannot suffer loss while the financier of a [company’s stock] can suffer loss, if the [business] fails to produce fruits.  Islam has termed interest as an unjust instrument of financing because it results in injustice either to the creditor or to the debtor.  If the debtor suffers a loss, it is unjust on the part of the creditor to claim a fixed rate of return; and if the debtor earns a very high rate of profit, it is injustice to the creditor to give him only a small proportion of the profit, leaving the rest for the debtor.

“…In this way, the rate of interest is the main cause for imbalances in the system of distribution, which has a constant tendency in favour of the rich and against the interests of the poor.”

Of course, Islamic Finance exists for those with access to it.  Shari`ah-compliant investment products are available in Muslim and even some non-Muslim countries.  Even countries as westernized and interest-based as the UK have Islamic banks, or traditional banks with Islamic Finance divisions.  The problem is, we’re not using them to the extent where they could do us any good.  We may eat halal, but we bank haram.  We put all our money in regular banks, then wonder why we struggle to get business loans, student loans, home loans and credit cards—and struggle even harder to pay them off in a bad economy.  I urge everyone to read The Case Against Interest by Abu Ubaydah Andrew Booso, which is not only a brilliant, detailed discussion of both the historic and current consequences of interest, but it’s a large part of what inspired me to write this post.

My intention is not merely to re-hash Br. Abu Ubaydah’s powerful argument against usury and the way in which it attempts to “create” money from nothing.  With Allah’s help, I also want to offer a simple, common-sense way to implement the solution in his concluding paragraph:

“Indeed, the current crisis should be a deep warning to theorists of Islamic economics to show high aspiration to develop leading theories and practices for all people, rather than continuing to play a limited role for a niche market, whilst the majority of people face the inequities of the current system. Such brave theorising and practice might mean also challenging some other religiously believed tenets of conventional economics, such as money creation and paper money.”

The problem is not whether Muslims have Islamic Banks in the countries where we live.  The problem is whether we understand that if we don’t, we need to start building them—with at least as much urgency as we devote to building new  masajid—as if our lives depend on it.  Considering (1) the consequences that Allah (swt) makes clear for those who deal in usury, and (2) the consequences already facing the millions of people who have lost everything to a global economy addicted to usury; our entire future, in this world as well as in the Hereafter, is  at stake.

It’s no secret that those of us with businesses need capital, those of us in school need student loans and those of us with jobs can’t always pay cash for a car or a home.  So where does our money come from?  It starts with Allah (swt) creating something from nothing:

“And He it is Who sends down water from the cloud, then We bring forth with it buds of all (plants), then We bring forth from it green (foliage) from which We produce grain piled up (in the ear); and of the palm-tree, of the sheaths of it, come forth clusters (of dates) within reach, and gardens of grapes and olives and pomegranates, alike and unlike; behold the fruit of it when it yields the fruit and the ripening of it; most surely there are signs in this for a people who believe.” (6:99)

One need not be an economist to know that a nation’s economy exists because it grows crops, or raises livestock, or catches fish, or mines for metals or precious stones, or drills for oil or natural gas, or manufactures goods, or builds structures, or harnesses energy from the sun, wind, water or nuclear power, or provides professional services such as medicine, law, education, tourism, hospitality, etc.  Allah (swt) provides us with the knowledge and the resources and we then go out into the land and use what we learn to develop what we’ve been given. Of course, it takes labor to farm, fish, explore, manufacture, build, etc.  Unless you’re going to enslave people and force them to work, you have to pay them.  Once investors invest capital in a business, that business can then pay people to do work.  I’ll leave for another debate the ethics (and economics) of pay vs. profits, and how some businesses profit enormously by squeezing as much productivity as possible out of as few workers as possible.  Capital puts people to work producing the goods and services people need and want, and when people have enough income to buy those goods and services, an economy is created.

The moneylenders of ancient times were well aware of these principles of market dynamics and formulated their diabolical scheme accordingly.  The history of usury, which Br. Abu Ubaydah so effectively breaks down, is murky and enigmatic at best, but its destructive effects on society couldn’t get much worse.

In The Case Against Interest, Br. Abu Ubaydah clearly describes how usury, like alchemy, is one of man’s many attempts to create something out of nothing.  As the credit crunch in the US and the debt crises in Europe have demonstrated, you can’t just borrow your way to prosperity.  You have to create real assets by paying people to do real work, so they have enough money to buy (and pay off) the goods and services that keep an economy going.

Those early moneylenders believed that money itself was a commodity to be bought and sold like food or livestock or precious metals.  They created what eventually became a global system of lending that forces the borrower to guarantee his or her repayment, plus interest, regardless of their own success or failure during the life of the loan (of which there is no guarantee).  Those lenders were often unscrupulous men comparable to the loan sharks or payday lenders of today.  They would loan you the money you needed, but whether you succeeded or failed—it didn’t matter.  You had to pay it back at a rate of interest that varied according to their perception of your ability to repay (like a credit score).  Your interest would compound periodically over the life of the loan, so that by the time you paid it back you ended up paying many times what you originally borrowed.  And if you couldn’t pay it back, the lender could legally take everything you owned.  Sound familiar?

What I discovered through the experience of this global financial crisis is that a home, like a commodity, is only worth what someone is willing to pay for it.  If few people are buying homes, because few people can afford them or because few can get approved for them, then simple supply-and-demand dictates that home values will drop.  In a normal market, the demand for housing increases with population growth.  There’s only so much land on which only so many homes can be built.  Therefore, as a population increases, so should the demand for (and thus, the price of) homes.

During the “housing bubble,” that demand was artificially inflated when banks started lending to sub-prime borrowers, and encouraging prime borrowers to treat their homes like ATM machines they could pull money from like a magician pulls a rabbit out of a hat.  Some would argue that the government “forced” them to lend to risky borrowers, but no one ordered banks to make “interest-only” sub-prime loans that started with a low, affordable payment but ballooned to a much higher payment within a few years; nor were they “forced” to lend to people with no income, no job, no assets and no good credit.  And neither were they “forced” to repackage and sell those sub-prime loans to Wall Street.

As record numbers of people became first-time homebuyers, or refinanced their existing homes with these interest-only loans, home prices skyrocketed and homebuilders could barely keep up with demand.  Historically, real estate has almost always appreciated in value, so it was thought that home prices would never go down.  Borrowers (myself included) were told “Get this loan now and in a year you can re-finance into a fixed-rate loan when the value of your home goes up!  Long before the payments go up.”

Meanwhile, the banks would slice and dice these high-interest loans and sell them to investors as high-yield mortgage-backed securities and collateralized debt obligations.  They paid corrupt ratings agencies to give these securities triple-A ratings, which made investors think they were safe investments.  Many of the mutual funds, pension funds and foreign governments that bought these securities had their own internal rules that said they could only put people’s money into A-rated investments.  To make these risky securities an even “safer bet,” Wall Street banks and insurance companies sold credit default swaps, which were like gambling bets that gave investors a payout if borrowers defaulted on the underlying mortgages.  It was like a casino getting a gambler to bet on red and black at the same time.  No one ever imagined the ball would fly off the roulette wheel and land on the floor!

When people’s payments started going up, sometimes doubling or even tripling, many could no longer afford to pay them.  Their incomes were not rising nearly as fast, if at all.  They began defaulting, which began to bring down the value of millions of other homes.  Or, when they tried to re-finance with a new loan, either their credit was bad (from the payments they had missed) or their home was worth less than the amount they had borrowed.  Either way, they were denied.  As more and more people defaulted on their loans, three things began to happen:  (1) the banks had less and less income coming in, (2) home values plummeted as foreclosures rose, and (3) investors started cashing in on those credit default swaps.  No one imagined that so many of those “insurance policy” CDSs would ever be exercised.  As their cash reserves were depleted by the day, banks large and small began failing, one after the other.  The ones who survived or were bailed out by the government began to cut back or stopped lending altogether.   The rest is history.