Tuesday, July 26, 2005

Rashid Rida on Riba -- III: Rationale for the Hayderabad fatwa + preliminary thoughts on credit risk

In this posting, I shall summarize the arguments used by the Hanafi Indian jurists in Hayderabad to justify their four fatwas, culminating in the conclusion that interest on loans is not definitively the forbidden riba. The arguments are provided on pp.19-72 of the publication I cited on earlier posts. Obviously, given the length of this presentation, I shall try to concentrate on the high points of the jurists' argument.

The first part of the argument stipulated that the term riba was mentioned in the Qur'an generally and in the abstract, with Sunnah providing the explanation. They relied on arguments by Al-Jassas Al-Razi (in Ahkam al-Qur'an), which indicated that the term was definitely not mentioned in the Qur'an to forbid all riba in the linguistic sense (since riba simply means growth or addition). Thus, he reasoned that the term was used in its juristic sense, which is thus abstract, and requiring explanation from the Sunnah. In particular, in disagreeing with the Shafi`i restriction of riba to monetary goods (gold and silver) and foostuffs (as their generalization of wheat, barley, salt and dates), he (Al-Jassas) said:

There are a number of reasons we do not accept their proof. One of them is based on our previous assertion that the term riba in Shar` [meaning revealed Cannonical Texts] was mentioned abstractly and generally. Thus, the very generality of the term cannot be used as juristic proof. Rather, other proofs must be used to establish that a transaction is characterized as riba, and thus the verse may be brought to bear on that transaction. [pp.22-23]

They further explained what they mean by the term being general and abstract (مجمل) by quoting Nizam al-Din al-Shashi:

A term's usage is characterized as general and abstract if it allows for different interpretations, thus its understanding requires further explanation by the one who used the term (المجمل هو ما احتمل وجوها فصار بحال لا يوقف على المراد إلا ببيان من قبل المتكلم). The example of this in legal areas is the verse "and forbade riba".

They also cited jurists of other schools indicating that the term was mentioned generally and in the abstract, including the Shafi`i al-Suyuti [p.21], and the Maliki ibn Rushd:

There has been disagreement regarding the verses: "Allah has permitted trade and forbidden usury", "Establish salah and pay zakah", "Allah has established an obligation on people to perform Hajj to The House", "Siyam has been established as an obligation upon you", are the terms [riba, salah, zakah, Hajj, siyam] being used generally and abstractly? (أهي من الألفاظ العامة المجملة؟). Some scholars have concluded that the terms were mentioned abstractly, and their understanding require other sources.
[Those who concluded that riba was mentioned abstractly] reasoned that seeking an increase through legitimate trade is not forbidden. Rather, what is forbidden is a particular type of increase, which can only be inferred from the Legislator's own words.

The text that they found to be explaining the general abstract term in the Qur'an is that of the six commodities (which stipulates two conditions in trading them: hand to hand, and in equal quantities). Thus, they did not distinguish between riba al-fadl and riba al-nasi'ah, since the Hadith equally characterizes increase in spot sales and deferment as "riba".

[ME-G Side remark: This is interesting to me, since my argument about the economic nature of riba relies on this Hadith, together with the Hadith of Bilal, on trading dates for dates on the spot in different quantities, and the Prophet's (p) order to sell his dates and use the proceeds to buy the other. Based on those two Hadiths, I reasoned that the objective is "marking to market" to ensure fairness in trading, and cited ibn Rushd and others who reasoned similarly. However, Dr. Anas Al-Zarqa and Dr. Monzer Qahf both told me that I should not confuse people by tying riba al-fadl to riba al-nasi'ah... Perhaps I should come back to that issue in a later posting].

The next step taken by the Indian jurists is to restrict riba only to commutative financial contracts (المعاوضات):

Muhammad [al-Shaybani] said: "Riba is only effected in sales (البيع), but not in voluntary contributions (التبرع)", after having argued that loans should be more readily permitted (لأن القرض أسرع جوازا من البيع), since their legal form is one of voluntary [charitable] contribution.

Shaykh ul-Islam al-Mirghiyani said: Riba is only effected in commutative contracts, and not in voluntary contributions (Kitab ul-Hibah).

ibn `Abidin reported the statement of Al-Zayla`i: "It (i.e. riba) is restricted to commutative financial contracts, to the exclusion of other commutative and voluntary contribution dealings".

Similar quotations were also provided from al-Shaykh Zahah, Al-Kasani, and other Hanafi jurists. The conclusion to which the Indian jurists were building up then follows on p.32:

Thus it has become clear that a defined benefit stipulated as a condition in loans (النفع المعين المشروط في القرض) is not a form of the riba mentioned in Canonical texts, since the verse mentioned the term only generally and abstractly - so that the desired meaning cannot be understood from the verse itself - and the Hadiths that explain the term are all restricted to sales and no other contracts. Thus, our jurists explicitly stated that riba is only effected in sales and not in voluntary contributions. Perhaps what they meant to say is that it is not the riba that is mentioned in Canonical Texts.
[Long footnote here from ibn Rushd's Al-Muqaddimat, wherein he explains `Abdullah ibn `Umar's prohibition of a stipulated increase on the lent amount as not being a direct application of the Textual prohibition of riba, but rather one that is inferred by analogy. They also cite Al-Baghawi making the same argument: that prohibition of interest on loans is inferred by analogy, not by direct application of the Cannonical Texts of Qur'an and Hadith].
Proof for this assertion is also probided by the king of schoalrs [that would be Al-Kasani] in Al-Bada'i`, wherein he forbade a stipulated increase in loans by saying: "because the stipulated increase is similar to riba" (ولأن الزيادة تشبه الربا). In this regard, that which is similar to riba cannot itself be characterized as riba.
As for the Hadith reported in Bulugh al-Maram on the authority of Ali, which everyone among the commoners and the elect have been narrating: "every loan which brings a benefit is riba" (), this Hadith cannot be used to explain the Qur'an, since it is not well established, and has no foundation. In this regard, ibn Hajar said: "[its chain of narration] includes Al-Harith ibn Usamah, whose narrations are not considered"...
[More references to Hadith scholars -- including Al-Zayla`i, Abi al-Jahm, Al-Bukhari, Al-Nasa'i, ibn Al-Humam -- who rejected the Hadith due to other weak links in its chain of narrators. In particular, ibn al-Humam said that the best one can say about this doctrine is that it is based on the views of the Prophet's companions, and they only agreed that it was reprehensible -- which implies that it is not riba, otherwise they should have concluded that it was forbidden].
As for Al-Ghazali and his teacher [that would be Al-Juwaini] concluding that this Hadith is valid, Al-Shawkani said in Nayl [Al-Awtar] that they are not experts in this art [of Hadith scholarship].

Thus, the authors of the Hayderabad fatwa concluded that interest on loans was not included in the Textual prohibitions of riba in Qur'an and Hadith, and reasnoed that `Abdullah ibn `Umar's characterization of such interest on loans as riba is based on analogy to the pre-Islamic riba (of increase in debt amount at maturity to allow further deferment) [p.37]. Moreover, [p.39] they cited the majority of jurists allowing repayment of more than the lent sum, if that increase was not stipulated as a condition at the inception of the loan. Such a voluntary increase at repayment is considered a part of good character, e.g. based on the Hadith narrated by al-Bukhari and Muslim on the authority of Jabir that the Prophet (p) ordered Bilal to repay his debt with an increase. Many other narrations to the same effect were also included [pp.39-41]. More detailed discussion of those who had different opinions were also included.

The next step is to exclude loans from sales in particular and commutative financial contracts more generally. Thus, they cite Al-Kasani in Bada'i` al-Sana'i` saying: "a loan for a period of time is a voluntary contribution contract, since there is no compensation for the time factor (لأن القرض للحال تبرع ألا ترى أنه لا يقابله عوض للحال و أنه لا يملكه من لا يملك التبرع؟), and one who cannot afford to make a contribution can't afford to make a loan?". They gave more arguments from classical sources to establish that loans are not commutative financial contracts. Most of those references highlight the fact that loans are similar to gifts or charity at their inception, because the lender doesn't know whether or not he will be repaid. To them (as it is for the jurists they cited, including ibn al-Qayyim), that establishes that the contract is different from commutative ones.

[ME-G Side-remark: I believe that those arguments can serve as a foundation for developing an authentic Islamic understanding of the notion of credit risk, and avoiding the naiive assertion by classical and contemporary jurists and Islamic economists alike that the reasons for prohibtion of interest on loans is that the lender does not carry any risk... To any banker, Muslim or otherwise, dismissing credit risk in that manner only shows that the speaker doesn't understand the basics of finance.]

The final step of the analysis is to argue that due to this fundamental difference between commutative financial contracts (wherein riba is forbidden) on the one hand, and loans on the other, forbidding interest on loans based on analogy to sales and other commutative contracts is invalid. Citing authorites from `Ata' to Ab Hanifa having ruled benefits stipulated at the inception of loans (i.e. interest on loans) as reprehensible (makruh; Muhammad [Al-Shaybani] reported in his book on currency exchange -- Sarf: أن أبا حنيفة رحمه الله كان يكره كل قرض جر منفعة).

This conclues my summary of the arguments used by the issuers of the Hayderabad fatwa. Their proofs definitely merit reflection and analysis, even if contemporary jurists maintain the generally accepted ruling that all interest on loans is riba. There are two issues I would bring up towards developing a meaningful Islamic finance:

1. Is every contract that is labeled "loan" (e.g. mortgage loan, auto loan, etc.) necessarily a loan in the classical juristic sense of qard (قرض)?

2. How would we develop a coherent theory of credit risk within the general Islamic theory of guaranty (ضمان), to distinguish between loans that do and others that should be treated as classical loans? (I have been pushing Walid Hegazy, who is writing his dissertation under Frank Vogel's supervision on the theory of Daman in Islamic jurisprudence, within a comparative context with modern theories of guaranty in western legal systems. I hope that he can bring some much needed legal scholarship to those issues).


Blogger heraish said...

Assalmu alikum

In the case of a conventional mortgage loan. In case of default. Late payment charges (interest) is added and then the totals are compounded until the foreclosure process is finished which could take up to 6 months. The "Sharia" contract in vogue today places a fixed late payment fee for every month missed without compunding as the situation drags. This is a small value added to the traditional mortgage loan.

So even if we consider the mortgage loan to be permissable in concept without the need for "sharia" equivalents, there are still certain details that are against the spirit of sharia. Which is the taking advantage of a person in distress.

wallahu alem

9:43 AM  
Anonymous Anonymous said...

Please post the name of the institution and/or scholars that published the Hyderabad fatwa. Thanks.

12:46 AM  
Blogger Mahmoud El-Gamal said...

I included in the first post on the fatwa all the information published in the book by Rashid Rida. Please see that posting. It appears to have been semi formal: The authors are not named, only that they were some jurists; but the fatwa was published by al-Humkumah al-Asafiyyah, and distributed by order of al-Sadarah al-`Ulya and al-maHkama al-Shar`iyyah.

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Blogger Muhammad Saeed Babar said...

Narrated Aisha

(the wife of the Prophet) Allah's Apostle used to invoke Allah in the prayer saying "Allahumma inni a'udhu bika min adhabil-qabri, wa
a'udhu bika min fitnatil-masihid-dajjal, wa a'udhu bika min fitnatil-mahya wa fitnatil-mamati. Allahumma inni a'udhu bika minal-ma thami wal-maghrami. (O Allah, I seek refuge with You from the punishment of the grave and from the afflictions of Masiah Ad-Dajjal and from the afflictions of life and death. O Allah, I seek refuge with You from the sins and from being in debt)." Somebody said to him, "Why do you so frequently seek refuge with Allah from being in debt?" The Prophet replied, "A person in debt tells lies whenever he speaks, and breaks promises whenever he makes (them)." 'Aisha also narrated: I heard Allah's Apostle in his prayer seeking refuge with Allah from the afflictions of Ad-Dajjal. Sahih Al-Bukhari 1:795

If the chain of narration of above Hadith is strong then loan / debt is most disliked by the Prophet (PBUH). We, the Muslims, should stay away from it. The issue of interest on loan comes after.

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