--Tariqullah Khan

The largest segment of the world’s poorest of the poor population lives in the regions where Islam is prevalent as a dominant religion for centuries. The conditions of the people and in this case, the predicament and perpetual and abject poverty of the people cannot be separated from the faith they follow. In this brief note I make the argument that Islamic faith is a barrier to accessing interest-based financial services and through this channel poverty and underdevelopment perpetuates among the Muslim population. International development financing strategies can be more effective in combating poverty by recognizing this barrier to accessing financial services and adopting policies to make financial services relevant for all.

The Islamic belief that Allah and His Prophet have denounced Riba in the strongest words is well-known. Riba is translated as the interest mechanism that underlies lending transactions and the most important being the interest in the banking transactions. True, not all Muslims believe in this equation of Riba with interest and this segment of the Muslim population will benefit from financial services and has the capacity to overcome poverty. However, an overwhelming segment of the Muslim population believes that interest is the predominant form of Riba. It is this segment of the Muslim population for which interest-based financial services are irrelevant and it is this segment that will hence fall into perpetual poverty due to the intense aversion to the interest-based financial services.

How much is access to financial services important for human development and poverty alleviation? The year 2005 was declared by the United Nations as the international year of financial inclusion – making financial services accessible to all including the poorest of the poor through micro-finance. Access to financial services was termed as a key to accessing all basic human rights – health, education, housing, funds for engaging in businesses etc. Barriers to accessing financial services were also identified. One of the identified barriers was faith. However, an extremely misleading policy prescription would be to change the faith and remove the barrier. It is extremely misleading – because faith by itself is a fundamental human right and there would always be an intense opposition to policies that call for changing faith and beliefs.

Hence a more pragmatic and globally implementable policy prescription is required and it is actually offered by Islamic finance. Catering to the preferences of those who believe that interest-based lending is not permissible, policy makers can add other items in the menu of financial services, making financial services relevant for the very large segment of the world’s population who are intensely averse to the interest-based finance. Through Islamic finance they can benefit by participating in the development process and be integrated into the main stream of the society in all countries of the world.

This pragmatic approach to international development financing is more acceptable, sustainable and effective especially in the hardship regions where poverty is abject. Moreover, the feasibility and credibility of Islamic finance has been established over the past three decades and especially during the global financial crisis. The international organizations such as the United Nations and the multilateral development banks such as World Bank and the Asian and African Development Banks can play a vital role in the implementation of such an international development financing strategy in combating poverty and achieving the Millennium Development Goals. -- Tariqullah Khan, Harvard University, 26 June 2011.

Comment 1

The author argues “…Islamic faith is a barrier to accessing interest-based financial services…” I don’t see the faith being a barrier to access financial services, but the interpretations of the faith are certainly a barrier. Based on an undefined notion of riba around which a never ending rhetoric continues for centuries without producing any meaningful set of guidelines. Fair trading with agreed upon benefits to parties, whether you call it profit or interest, is what should govern. In other words, financial transactions should be fair, non discriminatory, non exploitative, in other words ethical. Why should Muslim countries be treated differently when it comes to addressing the issue of poverty. It is up to the Muslim majority countries to sort out as to how they can adjust their interpretations of faith to the realities of the contemporary world without expecting that the world would change to respond to their whims. -- Dr. Mir Baiz Khan, Toronto Canada, 09 July 2011

Comment 2

I do agree with Dr. Mir Baiz Khan that a sizable segment of the world’s Muslim population doesn’t believe in the equation of interest with Riba. Should Dr. Sahib also recognize that another segment of the same population believes that interest is in fact the denounced Riba! Let us accept with a grain of salt that faith will always be interpreted wrongly for some and simultaneously rightly for others!

As an economist my purpose is to remind the global development agencies that their policies can become more inclusive and pluralistic by recognizing that the Islamic faith is a barrier to accessing financial services. The right way of addressing the perennial problem of poverty is to recognize and not deny faith being a barrier as such and to provide financial solutions consistent with people’s faith. It is just like having different items in the menu of a restaurant – vegetarian, non-vegetarian etc except for the systemic risks of a banking business.

Faith originated financial exclusion is indeed a rising phenomenon in the North American and European cities as well. Canada, UK and France are already addressing it with policy responses and opening up to Islamic finance. In fact there is a significant business opportunity in recognizing the problem like what Malaysia, Singapore, Indonesia, GCC countries and UK are doing.

It is interesting that in response to the global financial crisis even Pope Benedict XVI came on record in criticizing interest mechanism and the greed it breeds and named Islamic finance as a desirable alternative (see for example Bloomberg http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aOsOLE8uiNOg). 'The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service, the Vatican’s official newspaper Osservatore Romano said in an article in its latest issue late yesterday".  -- Tariqullah Khan, Harvard University, 10 July 2011.

Comment 3

 I am not giving any opinion but just want to put forward the translation of what the Qur'ân has to say on the subject of usury, that is lending money at interest: We may use our own intellectual only when we could not find any reference in Quraan and Ahadith about certain issue, not in in this particular case at all when there is very clear order of Allah (SWT) about riba.

“Those who devour usury will not stand except as stands one whom the devil by his touch has driven to madness. That is because they say: Trade is like usury: but Allah has permitted trade and forbidden usury.... Allah will deprive usury of all blessing, but will give increase for deeds of charity, for He loves not any ungrateful sinner.... O you who believe, fear Allah and give up what remains of your demand for usury, if you are indeed believers. If you do it not, take notice of war from Allah and His messenger, but if you repent you shall have your capital sums; deal not unjustly, and you shall not be dealt with unjustly. And if the debtor is in difficulty, grant him time til it is easy for him to repay. But if you remit it by way of charity, that is best for you if you only knew.” [Surah al- Baqarah, verse 275-280 ].

Islam, often laughed at for sticking to its principles and not "moving with the times", has never given in to the demands of the money-lenders to change its tough stance on interest. Naturally, Islam has increasingly been attacked by the financial interests behind today's media. Looking at the evidence with an open mind, however, it should not take you long to realize that Islam makes sense, and interest doesn't. -- Dr. Khalil (Jughooru), Hamilton Ontario Canada,11 July 2011

Comment 4

Dr. Khalil (Joghooru) has brought up something interesting for discussion for economists and development policy makers. In all forms of money lending the lender is mainly interested in the interest income and not as much in the repayment of the principal amount by the borrower. The lenders being clever tell the borrowers that since you are not able to pay back the loan you can pay it latter, but for now just continue paying the interest. This simple and unfortunate reality has destroyed nations through the international lending business and families through the credit card business.

 Like many countries, in Pakistan’s national budget the highest expenditure item – even more than defence budget - is that of interest payment, otherwise the country will be declared bankrupt! This is simply bad economics and totally illogical for any sensible mind. Joseph Stiglitz is considered among the world’s top 5 economists. Once he was the Chief Economist of the World Bank. In that capacity he advised (obviously in vain) the World Bank that if the developing countries are not able to repay the principal amount of their debts it is simply illogical and irrational to ask them to pay interest on the loans.

Dr. Khalil from Hamilton Canada – Dr. Khan from Toronto Canada, they represent the two segments of the population that appear in our discussions. In the context of the economic woes of families and nations, there is the need to find an impartial economic response to all this. --Tariqullah Khan, Harvard University, 11 July 2011.

Comment 5

Referring to comment 4 of Tariquallah, on the translation of verses of Quran which was main part of my letter, I myself and every other Muslim are more focused on what Quran tells us, how to spend my life or one can say we are trying our best to follow it, and not defending the religious short comings in our personal lives and we don’t care what John and Joseph say. As a Muslim, every one must try his/her best to follow Quran, which is explained very well through hadiths and by Mufasereen.

The concept of practicing and non practicing Muslim created by some trash ideologist does not exist anymore. Muslim is only the one who practices Islam, and the one who calls him/herself non practicing Muslim, is simply not a Muslim as Ulema say. As far as my previous letter is concern, it is verified translation of verses of Quran. According to Quran, the interest based activity can never bring prosperity in anyone’s life, as we can see in countries like USA and Canada its impacts. Pakistan and other Muslim countries are doing much batter economically.

As matter of fact 80% American are badly suffering of credit card over dues, 60% of Americans and Canadians live in homes actually belonging to bank, and same percentage of the people are driving the cars belonging to banks, almost 80% shops and stores and specially Gas stations belong to Banks (in US and Canada one can own a Gas station just with 15-20% down payment). On other hand in case of Pakistan , none is living in the home partially belonging to bank, No Pakistani is driving bank owned car.

The loans burden on our country is because of corrupt politicians. As not even 20% of the money borrowed from foreign countries or foreign banks etc is spent on public good activities. We are not thankful to any donor country to feed our corrupt politicians. We are not thankful to any NGO to establish microfinance institutions, as it is basically done to sustain the NGO(s) itself. -- Dr. Khalil (Jughooru), Ontario Canada,12 July 2011

Comment 6

This comment is not a rebuttal of the comments on my previous comment, but rather an appreciation of the way it is received, particularly by Tariqullah Khan, the author of the original article. I would like in brief to share more thoughts on this critical economic issue. I am neither an economist nor have expertise in Muslim banking system. However, I do have the good fortune to have general knowledge of the principles of Islam and the ethics that they underpin. Tariqullah is absolutely right that there has been and will always be different interpretations (I am avoiding to use the words ‘rightly’ and ‘wrongly’). Though I don’t have an expert knowledge of the developments in the Islamic banking area in countries that Tariqullah has cited, but as a general reader I am aware of them. His quotation from Bloomberg with reference to the ethical principles on which Islamic finance is based indeed captures my outlook on this issue. There are occasions I am fortunate to attend lectures by some high caliber speakers on these subjects. Last year, I attended a session where a key diplomat of the Islamic Conference spoke precisely on this subject and it was thrilling to hear that some vibrant intellectual endeavors are in progress to bring Islamic ethical principles to the knowledge of the global community and global financial system, which are by the way not different from those of many other faiths and humanity at large, to make its contribution to a fair, just and equitable global financial system to evolve. Tariqullah has undertaken an interesting area for his research. I look forward to reading his future writings on the subject, at times with some disagreements, which is what keeps the intellectual discourse going to find solutions in the interests of all.

As for Dr. Khalil’s comment, again there is no disagreement as to the riba appearing in the verses of the Qur’an. The difficulty with this term is its complexity; the wide variety of interpretations making it even more ambiguous to understand let alone to apply. Thus the definition of riba has never been and likely never will be conclusive. On the one hand the Qur’an condemns it and on the other hand it says it is like trade. I refrain from indulging in the jurisprudential discourse of it because that is not what I intend to know. What I am interested in is to hear views as to how the term understood and applied to financial transactions in the Muslim context. Dr. Khalil has quoted the Qur’anic verse from Yusuf Ali’s translation. To highlight ambiguity of the term, I am quoting below part of the same author’s commentary on the very verse.

“ Our ‘Ulama, ancient and modern, have worked out a great body of literature on Usury, based on economic conditions as they existed at the rise of Islam. I agree with them on main principles, but respectfully differ from them on the definition of Usury. As this subject is highly controversial…The definition I would accept would be: undue profit made, not in the way of legitimate trade, out of loans of gold and silver, and necessary articles of food, such as wheat, barley, dates, and salt (according to list mentioned by the Holy Apostle himself). My definition would include profiteering of all kinds, but exclude economic credit, the creature of modern banking and finance.”[Why?]

In other words, the term riba is open to anybody’s definition as per Yusuf Ali’s comment. He has given his preferred definition while leaving it to others to define the way they thought to be the definition. What is then the way out of this impasse? In my view, this is possible if the focus is on principles of the Muslim ethics rather than getting bogged down in a semantic -- Dr. Mir Baiz Khan, Toronto Canada, 12 July 2011

Comment 7

The discussion between Dr Khan and Dr. Khalil reminds me the fact that if someone is forced to eat something he will throw it out most likely. This fact is also recognized in the form of “there is no compulsion in religion” and the rule is of utmost importance for Muslim families who have decided to raise their children in the West. So my approach would be to bridge between the two Chitralis - Dr. Khan and Dr. Khalil - who have decided to make Canada their permanent home. A friendly advice, please, don’t ever force your views on others no matter how sacred you believe your views are.

I beg to differ with Dr. Khan in many ways. First, the entire impasse about the Riba-Interest nexus that he mentions is utterly exaggerated. Even if there is any view of Yousuf Ali which is open for further interpretation – that view existed about Eighty years ago. If Yousuf Ali has left any room for further interpretations of Riba, it was his way of removing the intense aversion of Muslims to the banking system because of interest. During the last four decades these views have been discussed extensively so much so that over 300 PhD research works have been done in the Western universities not to mention the knowledge explosion through other channels and the spread of financial, policy and educational practices all over the world. After all these developments there is no need for an effort to make interest consumable. Hence, even in the newer version of Yousuf Ali’s translation the ambiguity doesn’t exist anymore. This implies that right now, all the existing translations of the Holly Quran, including that of Yousuf Ali consider interest in all its manifestations as a form of the prohibited and denounced Riba.

In the western societies accepting the realities, namely, Dr. Khalil’s choice for example, policy makers shall promote inclusive, pluralistic and logical approaches and offer a menu of services. In the dominant Muslim population areas – the intense aversion to financial services can be reduced by recognizing that interest-based system by itself is basically flawed and imperfect and there is a better alternative in the form of Islamic finance. If that is not done, an important segment of the population will continue preferring poverty over hellfire. --Tariqullah Khan, Harvard University, 12 July 2011.

Comment 8

In my previous comments, I pointed out some issues arising out of the notion of unfair interest or in Qur’nic term riba and sought some clarifications from those who are engaged in research in this particular area. I viewed Tariqullah’s initial article an invitation for ideas that would assist him in articulating his research plan at Harvard. I might have misunderstood him because he appears to be defensive in his position and that is absolutely fine too. In my personal view, no system has ever been and will never be flawless because any human creation is an attempt and requires ongoing improvement. We know that the modern system has not been able to address fully the issue of poverty and that is why many new alternatives or complementary approaches are sought, locally, nationally and internationally. The best example is the financial institutional development by Nobel Prize laureate Muhammad Yunus who is also the founder of the Grameen Bank and originator of the microfinance services. I would like to recommend to Tariqullah two books, if he hasn’t read them yet, of this great economist. These are: “Creating a World Without Poverty: Social Business and the Future of Capitalism” and “Banker to the Poor: Micro-Lending and the Battle Against World Poverty.” These two books will introduce him to what I mean by Islamic values and ethics-based financial services.

Based on my personal experience, I will make a brief comment on the good side of the modern financial system. I arrived in Canada with a family of four hoping to proceed to Harvard University where I was admitted to one of its graduate schools. But financial limitations clipped my ability to proceed; I am sure many bright students from Chitral or for that matter from any disadvantaged parts of the world face similar situations. When I decided to go to the University of Toronto for my doctoral studies, I applied for loans, which was granted to me with no painful running around of which a substantial amount was forgiven in appreciation of my regular payment. I have accepted, like any other Canadian citizen, to pay interests on loans that I have acquired to purchase the house, a vehicle to drive, as well as on every item that I buy from the market and on monthly utility bills. I do it through bank transactions, using credit and debit cards and they also charge me interest for their services. At times I also receive cheques for overpayments. This modern system, with all its flaws, is working in Canada because people who are responsible make it work. -- Dr. Mir Baiz Khan, Toronto Canada, 13 July 2011

(Contd ---->>)

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