The last two decades have witnessed a great eagerness in the Islamic world to establish an interest-free economy.

 Since the Western countries introduced into the Islamic world a capitalist economy based on interest, a small group of people in the Islamic countries have insisted that interest on commercial loans is not ‘usury’ as prohibited by Islam. They argue that credit is a necessity in the present-day economic system, based as it on the principle of free enterprise and this is so especially in the developing countries. The wide range of necessary economic activities cannot be carried out on the principle of qard hasan (interest-free loans) and Islam should not interfere with these economic activities.

This proposition has opened the door for debate on the question of whether commercial interest falls within the ambit of riba or not. It attracted the attention of scholars throughout the Islamic world and the question was thoroughly examined in seminars, conferences, study circles and research institutes. Being engaged in this debate, which continued up to the 1960s, Muslim scholars could not pay due attention to working out a banking system which would operate without interest and substitute for the present modes of financing those conforming to the Islamic Shari’a principles.

Following an intensive debate between the  two sides, it was concluded that commercial interest was not allowed under the Shari’a as it fell within the definition of riba, which is strictly prohibited by the Qur’an and Sunnah.

This view was accepted at the level of the Shari’a scholars in a large number of seminars and also gained wide acceptance among the majority of Muslim economists.

What can be regarded as the final verdict in this respect is the resolution adopted by the Islamic Fiqh Academy of the Organization of the Islamic Conference in its second session, held at Jeddah, which was attended outstanding Shari’a scholars representing more than 45 Muslim countries. They unanimously adopted a resolution that banking interest was riba and that Muslim states must try to abolish interest from their economy and base the transactions of their banks and financial institutions on Islamic modes of finance only.

When the prohibition on banking interest was, by and large, accepted in the Muslim community, several attempts were made to establish Islamic banks and financial institutions which could provide a practical example of Islamic modes of finance. The task was not easy. The difficulties in this respect were manifold. On the one hand, the Islamic banks were expected to provide all the basic services which conventional banks were providing, and all these services were to conform to the Islamic injunctions. On the other hand, most of these services in their present form had no precedents in the heritage, of Islamic fiqh.

The basic resources of Islamic law or fiqh do not provide express answers to each and every problem emerging out of modern conditions. However, they have laid down a set of principles on the basis of which one can find answer to questions arising out of new problems. But the application of those principles to new situations requires a deep study of both Islamic jurisprudence and the modern pattern of human life. The exercise can only be undertaken by those individuals who are well-versed in Islamic jurisprudence and are also well-acquainted with modern economic problems.

Thus, the establishment of an Islamic order in modern banking requires a joint effort by bankers and economists on the one hand and scholars of the Shari’a on the other.

Such a joint effort was made possible by establishing Shari’a supervisory boards in the new interest-free banks. These boards consist of eminent Shari’a scholars from different Muslim countries. The bankers engaged in Islamic banking operations bring their problems before these boards, which find solutions for them in the light of the principles of the Shari’a. The resolutions of the Shari’a boards are binding on the Islamic banks, which are expected to carry out their business in strict conformity with them.

The Shari’a Boards of Islamic banks have opened new horizons for research, both in Islamic jurisprudence and in the banking system.

In the field of Islamic jurisprudence, they have introduced new dimensions and have made valuable additions to the juristic discussions available in the classical books of fiqh.

As Islamic fiqh relating to mu’amalat has never been applied to practical life on a collective scale in the last few centuries, it has not evolved to a point where it can deal with modern day-to-day problems in the socio- economic fields. No doubt, there have been some valuable attempts made by individual Shari’a scholars to respond to the modern challenges, yet, having no practical value in the social set-up of their respective countries, their ideas remained only academic and theoretical and were never tested and applied in practical life.

Thanks to the Islamic banks and their Shari’a Boards, these new ideas have now been put into practice, thus accelerating the evolution of Islamic fiqh in the economic, financial and commercial fields.

The Shari’a Boards of the Islamic banks are fully conscious of the fact that these banks are operating in isolation from the mainstream of the conventional financial institutions, which have the backing and force of governmental and international support. Therefore, unless the interest-free economic system is established, or, at least, recognized, by the state agencies, the Islamic financial institutions will continue to face difficulties and will not be able to work with full liberty to amend their operations according to the exemplary principles of the Shari’a. That is why the Shari’a                Boards have proposed two sets of alternatives by which the Islamic banks may abolish interest from their operations.

One set of alternatives consists of the utilization of ideal Islamic financial instruments, such as musharaka, mudaraba, etc, which have the ability to change totally the system of interest-based economy, to curb the evils originating from it and to bring about a     just  and equitable system of distribution.

But since the successful operation of these ideal Islamic instruments requires drastic changes in the overall economic framework which is beyond the control of individual Islamic banks, the latter cannot, for the time being, restrict their activities to these ideal alternatives only.

Keeping this in view, the Shari’a Boards have, at the same time, suggested another set of alternative financial instruments, such as murabaha and ijara (leasing), etc., which are by no means ideal solutions, but, if designed to fulfill some Shari’a requirements, can be adopted as a transitory measure.

It is these instruments which sometimes ten to resemble interest-based instruments and are criticised for having brought no practical change to t banking system as a whole.

This criticism is both justified and unrealistic; justified in the sense that these instruments are not ideal alternatives for interest from the Shari’a point of view and do not effect a radical change in the present banking system, but, at same time, unrealistic for two reasons:

Firstly, they are unrealistic because these instruments, despite their apparent resemblance to interest-bearing modes of finance, have certain major distinctive features as compared to them. For example, the modes of murabaha or ijara (leasing) financings, if applied in strict conformity with Shari’a requirements, have some element of risk for the financier, which, according to the Shari’a, is the basic condition for making a valid profit. Interest, on the other hand, has no element of risk. Hence, it is not permissible under the Shari’a.

Secondly, it should not be overlooked that in an atmosphere where the interest-based system governs the field of finance, it would be unrealistic to expect that the present system could be switched overnight to an ideal Islamic system. The move towards interest-free banking will have to pass through a transitory period in which some temporary devices may be necessary to escape from the purely interest- bearing modes of finance. These devices not be rejected or condemned for their not being the ideal alternatives to interest, because, having several distinguishing features, they can free banking transactions from at least the clearly prohibited elements of riba, qimar (gambling) etc. Therefore, this achievement should not be undervalued in the present circumstances.

But two important points must be kept in mind. First, the devices of murabaha or ijara cannot be justified unless their essential ingredients, as enunciated by the Shari’a, are fully observed. It should not be merely a matter of change of nomenclature.

For example, murabaha is the sale of some commodity on an agreed ratio of profit added to the cost. So there should be a commodity purchased by the bank then sold to the customer after obtaining ownership and possession. The possession of goods need not be physical in the strict sense. A constructive possession which passes on the benefits, risks and liabilities of the commodity to the buyer may thus be sufficient. But there should be a gap between purchasing the commodity and selling it to the customer, and the risk of owning the commodity during this period should be borne with all its basic components and all its essential consequences.

Secondly, it should never escape attention that these devices have been adopted only for a transitory period. They are neither the ideal Islamic modes of finance nor the ultimate goal to be achieved by the Islamic banks. The banks are under an obligation to advance towards the ideal Islamic modes of finance through musharaka and mudaraba and to minimise the transitory devices through a gradual process.

The Shari’a Boards of the Islamic banks are constituted to supervise the activities of the Islamic banks from these two angles.

In order to ensure that the transactions effected by the Islamic banks conform to the  rules of the Shari’a, the Shari’a Boards of several Islamic banks have drafted agreements for musharaka, mudaraba, murabaha, ijara (leasing), wakala (agency) and similar types of contracts. The managements of the banks are bound to follow these Model Agreements in each of their transactions. If some problem arises in applying those agreements and some amendments are needed, they are expected to bring the problems to the notice of the Shari’a Boards and explain the practical difficulties they are facing. The Board, after obtaining the relevant information on the subject, will deliver its fatwa (decree) which the bank must obey to solve the problem. The Shari’a Boards of Islamic banks have issued a large number of fatwas dealing with the current practical problems of Islamic banks. The fatwas of some Shari’a Boards are available in printed form, while those of most of the others are available at the relevant Islamic banks.

As mentioned earlier, the questions placed before the Shari’a Boards relate mostly to modern day-to-day problems which are not expressly mentioned in the original sources of Islamic Fiqh. To find their solutions needs innovative thinking by Shari’a scholars.

In the light of the settled principles of the Shari’a, it requires the exercise of some sort of ijtihad (independent judgement), in which the opinions of the scholars may differ. The members of the Boards, often specialising in different areas of Islamic learning, and sometimes representing different countries, settle these differences through an open discussion and exchange of views. On important problems, thorough research is undertaken and detailed articles are written, resulting in valuable additions to the richness of the literature of Islamic fiqh. After a careful examination of the relevant issues, resolutions are adopted either unanimously or by majority.

As the Shari’a Boards of different Islamic banks consist of different scholars, sometimes resolutions issued by one Board may differ from resolutions of others. To resolve these differences, the International Association of Islamic Banks has established a higher Shari’a Board. The Shari’a Boards of Islamic banks are rendering a great service to the cause of interest-free banking. Without their effective guidance, Islamic banks will not be able to achieve the goal of Islamization of the banking system.

Let me now propose some suggestions to improve the working of the Islamic banks to ensure their strict conformity with the Shari’a and to remove the shortcomings generally noticed in this field.

1. There is an impression that there exists a considerable gap between the making of resolutions by the Shari’a Boards and their practical application. This impression may be true, despite sincere attempts on the part of bank managements to implement them. The reason for this is obvious. The personnel employed to run the day-to-day business of the bank have generally been trained in the conventional banking system. They are not familiar with the new terminologies and the new methods introduced by interest-free banking. They sometimes do not appreciate the fine distinctions between Islamic and non-Islamic methods of financing and their respective implications. Therefore, they can unconsciously fall into errors in the practical application of the resolutions of the Shari’a Boards. I have experienced a number of such instances during my inspection visits to some banks. Some Shari’a Boards have formed inspection committees to check the actual practice of the banks and these have minimised the chances of error. Yet, the majority of the Shari’a Boards have no agency to ensure that their resolutions are correctly followed in actual practice. Errors of this kind may not be very basic, yet the fact remains that they should be eliminated by the Shari’a experts.

It seems necessary, for this purpose, that each Shari’a Board should form an inspection committee comprising some of its members. They should personally visit the banks, examine their problems, probe into their activities and check their operations from the purely Shari’a point of view. This will not only ensure the banks’ smooth running according to the Shari’a, but will also help the members of the Shari’a Board to understand their practical problems and to seek solutions with the deeper insight gained by this   more practical approach.

2. As mentioned earlier, the decisions of Shari’a Boards sometimes differ from each other. To resolve these differences, the International Association of Islamic Banks has set up a Higher Shari’a Board consisting of representatives from different member banks. But the jurisdiction of this Board is also restricted to those banks who are members of the International Association of Islamic Banks. A good number of Islamic banks who are not members of the Association stay outside the jurisdiction of this Higher Shari’a Board.

It would seem necessary for all groups running Islamic banks to form a joint Shari’a Board by whom all controversies may be solved. This will help to create uniformity in the working of all Islamic banks and advance the cause of interest-free banking.

3. There are certain Islamic banks which do  not have permanent Shari’a Boards, or have Boards of an advisory nature only, without binding authority over the bank management. Such banks hardly secure the trust of the people in the Islamic nature of their transactions. To find Islamic alternatives for the conventional methods of banks running on the basis of interest is very complex and needs effective guidance from Shari’a experts.

If the problem is dealt with without such guidance, the results will always remain subject to doubt and suspicion.

Such banks or financial institutions, therefore, should establish Shari’a Boards comprised of Shari’a scholars and should give them binding authority over the bank management in matters relating to legal aspects of the Shari’a.   

4. As mentioned earlier, the Shari’a Boards have proposed two sets of instruments for Islamic banks, the first being ideal Islamic instruments such as musharaka and mudaraba and the second being transitory devices.

There appears to be a tendency in some Islamic banks to restrict their activities to the second type of instruments only, without making a serious attempt to advance towards the ideal modes of Islamic finance. The Shari’a Boards should keep an eye on this tendency. If Islamic banking is restricted to these temporary devices alone and the real Islamic modes of finance are ignored, the Islamic banks will never create a good impression and the cause of interest-free banking will never be fulfilled.

The musharaka and mudaraba modes of finance, if adopted seriously and honestly, can ensure a better return to the depositors and provide more satisfaction to the people, as they are based on the principles of equitable distribution. Experience has shown that the banks who have adopted these instruments most often have distributed higher profits to their depositors than those who have not. No doubt, there are certain obstacles to the full-fledged operation of these instruments and that is why the second set of alternatives has been suggested, but this does not mean that the modes of musharaka and mudaraba should be totally avoided. The Islamic banks must make sincere and serious efforts to use these instruments in as many transactions as they can by removing the obstacles in the way of their operation. This is the very purpose for which the Islamic banks have been established and under no circumstances should they forget it.

The Shari’a Boards should regularly remind them of their duty in this respect and motivate and encourage them to fulfil their true objective.