Basic Principles and Concepts of Sharia Banking
a. Basic Principles of Sharia Banking
Sharia banks are banks that operate within the Sharia Principles. The practice of sharia principles typically differs from that of the conventional banks. The point to make is that the sharia principles refer to the Islamic law which is primarily guided by the Qur’an and Hadith. Islam as a religion is a concept that directs human life comprehensively and universally both in relation to the Creator (HabluminAllah) and relationship among the humans (Hablumminannas).
There are three main pillars of the Islamic teachings:
Faith (Aqidah): is the component of Islamic teachings that governs the faith in the existence and power of God that must be held by a Muslim when carrying out various activities on earth solely to have Divine satisfaction as a caliph who wins trust from Allah.
Islamic Law (Sharia): is the component of Islamic teachings that governs the life of a Muslim both in the field of worship (habluminAllah) and in the field of dealing between the humans (muamalah) (hablumminannas) which is the actualization of the faith in which he/she believes.
While dealing between the humans (muamalah) itself includes the various fields of life, such as those involving economy or property and commerce, which are called muamalah Maliyah.
Character (Akhlaq): is the basic behavior and personality that characterize the person as a devout Muslim under the Islamic law (sharia) and on faith (aqidah) by which he/she is guided in his/her life as it is called akhlaqul karimah as the hadith of the prophet provides “I won’t be sent except to actualize akhlaqul karimah.”
There are quite a lot of the Islamic guidance that govern the economic life of the worldwide community of Muslims (ummah), as follows:
- Not allowing multiple forms of activities that contain the elements of speculation and gambling, including the economic activities which are believed to harm the community. Islam establishes the function of money solely as a medium of exchange and not as a commodity, it is therefore improper for trade, more so it contains the element of uncertainty or speculation (gharar), then the case is not about the price of money when connected to the passage of time, but the value of money to be exchange for goods.
- Assets must monetized (commercialized) as such that they should not only be held by a handful of people when God dislikes people who hoard assets so as to be unproductive, and therefore, those who have unproductive assets should give more charity (zakat) than those who make them productive. This is also based on the teaching that provides that the position of humans on earth as a caliph who accepts the trust of God as the absolute owner of all that is contained in the earth and it is the duty of the humans to make it in the best prosperity and welfare of the people.
- Working and/or earning a living is worship and required of so that no one is out of work - which means be prepared to face risks - can have profits or benefits (compare with earning bank interest from deposits that are fixed and almost without risks).
- In the various fields of life, including in the economic activities, transparency and justice must be maintained of own free will and under no duress on the part of any party.
- There is an obligation to make records on every transaction, especially non-cash transactions, and there should be reliable witnesses (matching with the obligations of accountants and notaries).
- Charity (zakat) is an instrument to fulfill the obligation to set aside assets which are by right of others who are eligible to receive them, and it is strongly encouraged to spend (infaq) and give charity (sadaqah) as the manifestation of the significance of equitable distribution of wealth and fighting the poverty.
- It has actually been agreed upon by ulemas, jurists (fiqih) and Islamic bankers within the Islamic world communities who claim that bank interest is usury (riba) and usury is forbidden.
Islamic banking must, in its operation, always be within the following principles:
- Justice, which is to share profits on the basis of the real sales according to the contributions and risks of each party
- Partnership, which means the position of investor customers (depositors), users of funds, and financial institutions themselves are equal as business partners who establish synergy to reap the benefits
- Transparency. Sharia financial institutions will provide financial reports transparently and continuously so that the investor customers know the condition of their funds
- 4. 4. Universal, which means there is no discrimination on the grounds of ethnic, religion, race, and social group within the Islamic principles as Islam is the blessing for all human beings (rahmatan lil alamin).
The sharia principles prohibited from being operated in the sharia banking are the activities that contain the following elements:
Games of Chance or Gambling (Maisir): Linguistically speaking, maisir means easy. Terminologically, maisir means earning profits without having to work hard. Maisir is often known as gambling because in the gambling practice one can reap the benefits easily. In gambling, maybe one can earn profits or suffer loses. Gambling is prohibited in the practice of Islamic finance, as stated in the word of God: “O’ you who have Faith! Verily wine, gambling, idols, and (dividing by) arrows are an abomination of the Satan’s work, so avoid it, that you may be prosperous.” (QS Al-Maidah: 90)
Maisir is prohibited by Allah SWT because of the negative effects. In gambling, someone is faced with a situation they could be lucky or lost abnormally. One time when someone is lucky he gets a bigger profit than the effort he makes. When unlucky, someone may suffer substantial loss. Gambling is other than in accordance with the justice and balance principles so that it is forbidden in the Islamic financial system.
- Chance (Gharar): Linguistically, gharar means chance. Terminologically, gharar means something that contains uncertainty or gambling. Every transaction in which the goods are uncertain or not in the possession of someone, or in other words, inaccessible, including sale and purchase. Included in the uncertain transactions (gharar) are, for example, to purchase birds while they stay aloft or fish while they are in the water or buying cattle that are still in their mother’s womb. Gharar is prohibited because it has a negative effect on life as gharar is a practice of making profits invalidly. Verses and hadith that forbid gharar are, among others: “And do not consume one another’s wealth unjustly or send it [in bribery] to the rulers in order that [they might aid] you [to] consume a portion of the wealth of the people in sin, while you know [it is unlawful]. (Al-Baqarah: 188)
- Usury (Riba): Literarily it means addition, excess, growth or increase. Technically speaking, riba means taking extra from the basic assets or capital invalidly. Ulemas agree that usury is considered unlawful. The word of Allah SWT in surah Ali Imran verse 130 forbids us to gain assets by usury doubled and multiplied. We know from the early discussion that there are no differences among the Muslims regarding the unlawfulness of riba and that all Muslim schools of thought argue that involvement in transactions containing riba is a grave sin. The main sources of Islamic law, such as the Qur’an and the Sunnah, extremely condemn riba. There are, however, differences in the meaning of riba, or anything which is usury in nature must be avoided to adjust the economic activities to the sharia teachings.
There are many verses of the Qur’an that explain the unlawfulness of usury, including:
- Surat Al-Baqarah, verse 275:
Those who consume RIBA cannot stand except as one stands who is being beaten by Satan into insanity. That is because they say, trade is just like USURY (RIBA). But Allah has permitted trade and has forbidden USURY (RIBA). So whoever has received an admonition from his lord and desists may have what is past, and his affair rests with Allah. But whoever returns to (dealing in usury or RIBA), those are the companions of the fire; they will abide eternally therein.
- Surat An-Nisa, verse 161:
And for their taking of usury (riba) while they had been forbidden from it, and their consuming of the people’s wealth unjustly. And we have prepared for the disbelievers among them a painful punishment.
- Surat Ali ‘Imran, verse 130:
O you who have believed, do not consume usury (riba), doubled and multiplied, but fear Allah that you may be successful.
- Surat Ar-Rum, verse 39:
That which you give in usury (riba) in order that it may increase on (other) people’s property has no increase with Allah.
Types of Usury (Riba)
According to fiqih ulemas, there are 4 (four) types of usury (riba):
- Usurious Sales (Riba Fadhl), is the exchange of two goods of the same type but unequal in weight or quantity required by the exchanger. For example, sell gold in exchange of equivalent gold, sell silver in exchange of equivalent silver, sell rice in exchange of equivalent rice, sell wheat in exchange of equivalent wheat, etc.
- Loans Usury (Riba Qardh), is lending something on condition that there are benefits or additions for the lender. For example: Andi borrows Rp25,000 from Budi. Budi requires Andi to return his debt to Budi Rp30,000, then the additional Rp5,000 is Riba Qardh.
- Usury of Manual Transactions (Riba Yad), separating at the place before delivery. It means the person who buys an item and before he receives the item from the seller, the buyer sells it to someone else. This kind of trade is not allowed because the trade is still tied to the first party.
- Interest on Debt (Riba Nasi’ah), is the exchange of two similar or non-similar goods with increment on the principal of a debt repaid/delayed by the borrower. For example: Rusminah buys a ring of 10 grams. The seller requires her to pay it with a gold ring of 12 grams next year, and in case of a one year delay, plus 2 more grams to make 14 grams, etc.
Salutary Effects of Prohibition of Usury (Riba)
Many parties have expressed different opinions about the rationale or the purposes for which usury is prohibited by the Islamic law. On the whole, socio-economic justice and distribution, inter-generation balance, economic instability, and ecological destruction are considered the basis for prohibition of usury. Based on all texts and principles relevant to the Islamic law, the only convincing reason is the distribution justice because Riba is prohibited in order to prevent the accumulation of wealth in a handful of people, that is, wealth may not merely “circulate among the wealthy among you” (Holy Al-Quran, 59:7). Therefore, the main purpose of the prohibition of usury is to obstruct the means leading to the accumulation of wealth in a handful of people, both banks and individuals.
b. Ulemas’ Views on Bank Interest
Fiqh ulemas hold that the interest charged in loan transactions (liabilities/claims, al-qardh wa al-iqtiradh) has met the criteria of usury (riba) which Allah SWT forbids, as stated, among others, by Al-Nawawi, al-Mawardi, as follows: Our friends (ulemas of the Syafi’i school of thought) have different opinions about forbidden usury (riba), as confirmed by the Qur’an with two views. First, the prohibition is global (mujmal) as described by the sunnah. Every law concerning usury (riba) presented by the sunnah is an explanation (bayan) of the globality of the Qur’an, both spot usury (riba naqd) and interest on debt (riba nasi’ah). Secondly, that the prohibition of usury (riba) in the Qur’an actually only covers usurious loans (riba nasai’) which is known as the Age of Ignorance (Jahiliah) communities and additional requests for assets (receivables) because of the additional period (repayment). Any of the party will, when the payment of accounts receivables is due and the debtor fails to pay it, add the debt and also add the payment period. This will happen again on the next due date. That’s the word of God for: “... never eat up usury (riba) doubled and multiplied ...” The Sunnah then adds usury (riba) in the currency exchange (naqd) for usury (riba) contained in the Qur’an.
The interest on a loan (qardh) prevailing above is worse than usury (riba) which is forbidden by Allah SWT in the Qur’an because additional usury (riba) will be charged at maturity, whereas the additional interest system will be immediately charged since the occurrence of a transaction.
Jumhur (majority/most) Ulemas agree that bank interest is usury (riba) because it is considered forbidden. The meeting of 150 prominent Ulemas at the Islamic Research conference in Muharram 1385 H, or May 1965 in Cairo, Egypt, agreed by acclamation that all the benefits of various types of loans are all the forbidden practices of usury (riba), including bank interest. Various international scholars forums also issue directions (fatwa) on the forbidden bank interest.
Abu zahrah, Abu ‘ala al-Maududi Abdullah al-‘Arabi and Yusuf Qardhawi say that bank interest belongs to interest on debt (riba nasiah) which is forbidden by Islam. Therefore, Muslims should not have exposure to banks that operate the interest system, except in case of emergency or necessity. Yusuf Qardhawi even did not know the term emergency or necessity, but he forbade it absolutely. This opinion is corroborated by Al-Syirbashi, to him bank interest earned by someone who saves money in a bank is typically usury (riba), regardless of low or high interest. But those in need are allowed by the religion to borrow money at the bank at interest.
The forbidden bank interest decreed by multiple forums of International Ulemas are among others:
- Majma’ul Buhuts al-Islamy in Al-Azhar, Egypt in May 1965
- Majma’ al-Fiqh al-Islamy by the Organization of Islamic Cooperation states held in Jeddah on 10-16 Rabi’ul Awal 1406 H/December 22, 1985.
- Majma’ Fiqh Rabithah al-Alam al-Islamy, decision of 6 Session IX held in Mecca on 12-19 Rajab 1406 H.
- Decision of Dar Al-Itfa, the Kingdom of Saudi Arabia,1979
- Decision of the Supreme Sharia Court of Pakistan, December, 22 1999.
- Fatwa of Dewan Syari’ah Nasional (DSN), Majelis Ulama Indonesia (MUI) of 2000 stating that interest is other than in accordance with the Islamic law.
- Decision of Lajnah Tarjih Muhammdiyah Session of 1968 in Sidoarjo that suggests that PP Muhammadiyah makes the conception of economic system work, especially Banking Institutions, subject to the Islamic principles.
- Decision of the Alim Ulama National Conference and NU Summit Conference of 1992 in Bandar Lampung that encourages forming Islamic Banks with zero interest system.
- Decision of Ijtima Ulama of the Pan-Indonesia Fatwa Commission concerning Fatwa on Interest (interest/fa’idah), on 22 Syawal 1424/December 16, 2003.
- Decision of the Fatwa Commission Meeting, MUI, on 11 Dzulqa’idah 1424/January 3, 2004; 28 Dzulqa’idah 1424/January 17, 2004; and 05 Dzulhijah 1424/January 24, 2004.