We Don’t Go to Bars, Why Do We Go to Banks? (Part II)

By Douglas Kelly

Part I | Part II

You don’t have to be a scholar or an economist to see that usury was at the heart of the global financial crisis.  Everybody wants a “guaranteed” return on his or her money, but Allah (swt) is the only One who can guarantee anything.  The world’s greed for interest, coupled with its lack of risk tolerance (or lack of faith), made triple A-rated mortgage-backed securities look like good safe investments a few short years ago.  After all, who’s not going to pay their mortgage?  We now know the answer to that question.

Lost your job?  Got sick or hurt?  Can’t pay your mortgage?  Can’t sell your house because the value has plummeted to less than what you owe on it?  No matter how many years you’ve paid your non-Islamic mortgage on time, the minute you can’t, the bank forecloses on you.  They pocket all that interest you paid for all those years, sell your house, cash, for pennies on the dollar, and start all over again, giving some other sucker a high-interest loan on its full appraised value.  Like a casino, they win and you lose.

Long before I embraced Islam, I noticed that even the Bible warned against interest and instead encouraged investing in people:

“If you should lend money to my people, to the afflicted alongside you, you must not become like a usurer to him.  You must not lay interest upon him.”  (Exodus 22:25)

“Cast thy bread upon the waters: for thou shalt find it after many days.”  (Ecclesiastes 11:1)

“He who is kind to the poor lends to the Lord, and He will reward him for what he has done.”  (Proverbs 19:17)

It seems that Prophets throughout human history advised  those blessed with wealth to take a chance with their money and trust in God for the increase.   The system of interest-free lending that the Prophet Muhammad ﷺ revealed—and upon which Islamic Finance is based—reads a lot like traditional Investment Banking.  So does Mufti Usmani’s description of a Shariah-compliant financial product called Musharakah (an Arabic word that literally means “sharing”).  It sounds to me as if Allah (swt) wants the lender and the borrower to be partners, sharing in the profits and losses of trade.  If the borrower is successful, the lender profits in kind.  If he fails, Allah (swt) accepts the lender’s loss as a charity (according to his intentions):

“And whatever you lay out as usury, so that it may increase in the property of men, it shall not increase with Allah; and whatever you give in charity, desiring Allah’s pleasure—it is these (persons) that shall get manifold.”  (30:39)

When I was a stockbroker in the 1980s, there was a lot more Investment Banking activity than you see today.  If you owned a business and you needed capital, you didn’t necessarily have to go to a commercial bank for a business loan.  You could go to a Wall Street investment bank and “go public,” by selling shares of your business to investors.  If your business did well, everyone who bought the shares of your IPO, or Initial Public Offering, could make many times what they invested.  If it failed, however, they could lose their entire investment.  It was all about taking a chance.

These days, it is considerably harder for businesses to raise capital through Investment Banking.  Google, VISA and Tesla are among the few well-known successful IPOs in recent years.  In the US, people are losing jobs because small businesses can’t get loans because banks aren’t lending.  If commercial banks aren’t lending like they used to, clearly investment banks aren’t helping businesses “go public” like they used to.  In fact, if you aren’t an already-successful business prepared to raise somewhere in the tens of millions of dollars in capital, most investment banks won’t even look at you.

Wall Street was created shortly after America’s birth, in order to put people to work by putting their money to work, taking a chance by investing in people’s businesses.  These days, no one wants to take a chance anymore, and everyone wants a “guaranteed” return on his or her money.  When the “housing bubble” burst, and even the most seemingly “guaranteed” investment—mortgage-backed securities—went belly-up, you would think that the world would finally get it:  that man can’t guarantee anything.  Nor can he create something from nothing.

When you buy shares of a company’s stock, you are, for all intents and purposes, loaning that company your money with no guarantee of getting it back.  When that company makes a profit, your stock goes up.  If it loses money, your stock goes down.  Life in this dunya is full of ups and downs.  Masha’Allah.

“Sons of Adam speak against [the vicissitudes of] Time, and I am Time, in My hand is the night and the day.” (Muslim)

Of course, not all stocks are halal.  Islamic Banks would obviously not finance companies that deal in pork products, pornography, alcohol, gambling or anything that is haram.  Shariah-compliant financial institutions are overseen by councils of scholars who adhere strictly to the Qur’an and Sunnah in making decisions.  While no organization run by man is perfect, it is clear that banking with Islamic Banks is a more pious alternative than the status-quo institutions that put the world in crisis.  Believers may have no control over whether their government complies with Shariah law, but if they have access to Islamic Banks, they can certainly control whether their money is borrowed and leant according to Shariah.  If Islamic Banks are following the Qur’an, they are lending  believers’ money as if lending it directly to Allah (swt):

“Who is he that will lend to Allah a goodly loan so that He may multiply it to him many times? And it is Allah that decreases or increases (your provisions), and unto Him you shall return.” (2:245)

“Indeed Allah took the covenant from the Children of Israel, and We appointed twelve leaders among them. And Allah said: ‘I am with you if you perform As-Salat and give Zakat and believe in My Messengers; honor and assist them, and lend a good loan to Allah, verily, I will expiate your sins and admit you to Gardens under which rivers flow (in Paradise). But if any of you after this, disbelieved, he has indeed gone astray from the Straight Path.’”  (5:12­)

“Who is he that will lend Allah a goodly loan: then (Allah) will increase it manifold to his credit (in repaying), and he will have (besides) a good reward (i.e. Paradise).”  (57:11)

“Verily, those who give Sadaqat (i.e. Zakat and alms), men and women, and lend Allah a goodly loan, it shall be increased manifold (to their credit), and theirs shall be an honorable good reward (i.e. Paradise).”  (57:18)

“If you lend Allah a goodly loan (i.e. spend in Allah’s Cause), He will double it for you, and will forgive you. And Allah is Most Ready to appreciate and to reward, Most Forbearing.”  (64:17)

“Verily, your Lord knows that you do stand (to pray at night) a little less than two thirds of the night, or half the night, or a third of the night, and also a party of those with you. And Allah measures the night and the day. He knows that you are unable to pray the whole night, so He has turned to you (in mercy). So, recite you of the Qur’an as much as may be easy for you. He knows that there will be some among you sick, others traveling through the land, seeking of Allah’s Bounty, yet others fighting in Allah’s Cause. So recite as much of the Qur’an as may be easy (for you), and perform As-Salat and give Zakat, and lend to Allah a goodly loan. And whatever good you send before you for yourselves (i.e. Nawafil non-obligatory acts of worship: prayers, charity, fasting, Hajj and ‘Umrah), you will certainly find it with Allah, better and greater in reward. And seek Forgiveness of Allah. Verily, Allah is Oft-Forgiving, Most-Merciful.”  (73:20)

The Prophet Muhammad ﷺ also outlawed derivatives like commodities futures, as they involve betting on the future, or hoarding foodstuffs people need in order to wait for a higher price:

“If anyone keeps goods till the price rises, he is a sinner.”  (Muslim)

“He who brings goods for sale is blessed with good fortune, but he who keeps them till the price rises is accursed.”  (Ibn Majah, Darimi).

“If anyone withholds grain for forty days, thereby desiring a high price, [he has] renounced God and God has renounced him.”  (Razin)

“Whoever pays in advance the price of a thing to be delivered later should pay it for a specified measure at specified weight for a specified period.”  (Bukhari)

Only Allah (swt) knows the future.  The Prophet ﷺ also spelled out the loan guarantee that only Allah (swt) can make:

“He who grants a respite to one who is in straightened circumstances or who remits his debt, will be saved by God from the anxieties of the Day of Resurrection.”  (Muslim).

“If anyone accepts others belongings meaning to pay back, God will pay back for him, but if anyone accepts them meaning to squander them, God will on that account destroy his property.”  (Bukhari)

“Every fault but a debt will be forgiven to a martyr.”  (Bukhari)

“A believer’s soul is attached to his debt till it is paid.” (Shafi’i, Ahmad, Tirmidhi, Ibn Majah, Darimi)

“May Allah’s mercy be on him who is lenient in his buying, selling, and in demanding back his money.”  (Bukhari)

Besides dealing in interest and trading in haram businesses, the biggest difference between Wall Street and Islamic Finance seems to me to be, once again, people vs. profits.  Many publicly-traded companies pollute the environment, make harmful products, or overwork, underpay, injure or even kill their workers, all in the name of maximizing profits.  My understanding of to “lend Allah a goodly loan” is to use one’s wealth to develop earth’s resources by putting people to work safely and paying them properly, with the hope of a reward from Allah (swt) according to one’s intentions.

One need only study the outcome of the sovereign debt crisis in Europe vs. the sovereign debt crisis in Dubai to see the benefit of Shariah-compliant instruments such as Sukuk Bonds.  While far from perfect, those instruments brought the UAE to a relatively soft landing, compared to the still-unfolding developments in Europe.

Even the way in which banks decide where to invest people’s money has become less focused on people’s needs, and more focused on banks’ need to “guarantee” profit.  Back when I was a stockbroker, almost all stock-picking was based on fundamentals.  Financial analysts made recommendations to buy or sell a stock based on the basics of that company’s business:  its management team, market capitalization, market share, earnings-per-share, balance sheet, business model, etc.  Today, technical analysis, or stock research that tries to forecast the direction of a stock price by studying trends like changes in price and volume over time, has overtaken fundamental analysis as the main method of figuring out whether an investor should buy, sell or hold a given stock.  Every day in the business news media, market strategists fall over themselves (and often contradict each other) to interpret moving averages, advance-decline lines, support and resistance levels and other statistical factors, in a sophisticated but flawed effort to “scientifically” predict the future.  A future that only Allah (swt) knows.

I mentioned the increasing use of technical analysis to illustrate the gradual shift away from human factors in investing, and towards a reliance on statistical models and raw numbers.  I remember years ago a TV commercial for Janus mutual funds that touted how their analysts visited a construction site to physically count the number of cables a company was installing.  This was billed as their “hands-on” approach to determining if a company was a good investment.  Contrast that with today’s Ameritrade commercials that promote things like “heat mapping” and “advanced charting tools.”  It’s as if no one cares any more about the human element of business.  Managers decide where investors should put their wealth by looking at charts, graphs and algorithms of the past, instead of looking at where that wealth will employ the most people at the best pay, which would in turn create the most demand, which is what drives an economy.

In the debate over the Bush tax cuts for the rich, those who favor them expiring on schedule, as well as those who favor extending unemployment benefits to those still out of work understand the Keynesian economic principle that helping the poor stimulates the economy.  Many of those in favor of permanent tax cuts for the top 1% argue that such cuts would spur job growth.  History tells a different story.  Both methods increase the US federal budget deficit.  Relief money for the poor gets spent immediately and the increased demand keeps people working and even creates jobs.  Meanwhile, tax cuts for the rich get saved in banks and investments, which only helps the bottom line of the banking industry in terms of commissions, fees and, yes, interest.  History also shows that the amount of those tax cuts that the rich spend on luxuries does little for the overall economy.

A glaring example of this is what is happening with the banks as of the time of this writing.  Instead of lending to businesses and consumers, banks are hoarding cash and buying Treasury bonds.  So they’re lending to the government, to make “guaranteed” money off interest, but they’re not lending to you and I.  And even when they do, it’s not to share in our profits but to make us guarantee theirs—when we pay them far higher interest than what they pay to get the money they lend to us.   Yet if we lose our jobs and can’t pay, they put us out of business and put us out of our homes no matter how much we’ve put into them.  Banks borrow their money for next to nothing, but they want everything from the people who need that money the most.  Meanwhile, the largest ones got bailed out handsomely (with the people’s money) when they got in trouble.

But the deeper issue is about society as a whole.  Allah (swt) made usury haram for a reason.  It enriches those who have money at the expense of those who need it.  We suffer as an Ummah when we can’t get money to launch our businesses, or go to school, or buy big-ticket items like a home or a car.  We go to banks because we think we don’t have a choice—and the result is that all our hard-earned money goes to institutions that make their money from the usury they charge when they lend out the money we deposit.

If you think about it, every Muslim doing business with a traditional bank is, in a very real way, funding usury.  Which is haram.  Non-Islamic banks have no reason to care about the financial needs of the Muslim community, and may even fund activities that are destructive to Muslims.  Aren’t the financial needs of the Believers the very reason the Prophet (ﷺ) revealed the hadith on usury in the first place?

Imagine what would happen if every Muslim in the world who had a bank account suddenly withdrew all their money and put it into an Islamic Credit Union, or a Shariah-Compliant Investment Company?

What if your business was financed with an interest-free loan you paid back according to your profits?  No profits, no payments.  The more you profit, the greater the dividend to your lender.

What if your student loan payments were based on the salary of the job you got once you graduated?  What if that loan was forgiven as long as you couldn’t find work?

What if your home mortgage allowed you to own a greater percentage of your home with each payment you made?  The more payments you made, the more of the home you owned.  If you couldn’t pay, the home would get sold and everyone would walk away with what they put in.

Only Allah (swt) knows if these high ideals of Islamic Finance can be put into practice in precisely this way in the real world.  But what if when you borrow money you’re not just a number, but a human being and a beloved member of a community that takes the time to get to know you, your family, and your needs?   What if your lender was your partner—instead of your slavemaster?  What if the institution that financed your business, your home and your education rode with you through life’s ups and downs, and didn’t make money unless you made money?  Call me naïve, but I think this is what our Prophet ﷺ had in mind.

Again, I’m no scholar.  I’m just a recent revert to Islam who couldn’t help but notice that there’s a credit crisis going on that was caused by banks dealing in usury.  Those dealing in usury want to create money out of nowhere with their Wall Street wizardry.  And they expect borrowers to guarantee their profits, when only Allah (swt) can guarantee anything.  So it would seem to me that if Believers don’t eat pork, drink alcohol or gamble, neither should we support usury by keeping our money in banks.  Maybe if we all moved all our money to Islamic credit unions and Shariah-compliant financial institutions, jobs might get created, real assets might get created and, inshaAllah, wealth might get created.  And even if it didn’t, we would at least stop enabling usury, which is haram.  Thus avoiding the painful chastisement promised by Allah (swt).  And thus pleasing Allah (swt) because any money we lost in the process would count as charity.  But what do I know?  Allah (swt) knows best.