Archive for the ‘Money and Economy’ Category

Business and the work ethic in Islam

Monday, August 19th, 2013

I came across the following last week and thought to talk about it a bit today:

From unemployment to self employment:

A beggar from Medina came to the Prophet (PBUH) and asked him for money. The Prophet (PBUH) asked him, “Have you nothing in your house?” The man replied, “Only a cloth, part of which we wear and part we use for carpet. And a wooden bowl from which we drink water.” The Prophet (PBUH) told him to bring them to him. He did.

The Prophet (PBUH) held the items in his hand and started an auction, “Who will buy these?” One man bid a Dirham (a silver coin). Another bid two Dirhams and bought the two items.

The Prophet (PBUH) gave the two Dirhams to the beggar and told him, “With one Dirham, go buy food and clothes for your family. With the other Dirham, buy and axe, go out with it and chop wood and sell it in the market. I don’t want to see you again for fifteen days!”

Fifteen days later, the man came back to the Prophet (PBUH) and reported to him that he made ten Dirhams selling the firewood that he chopped!

This story is reported by Abu-Daawood from a narration by Anas ibn Maalik. He did not immediately rate it, but indicated later that its authenticity was sound. The tenor of the story is confirmed by a hadeeth, reported and authenticated by Muslim and narrated by Abu-Hurayra that the Prophet (PBUH) said, “Carrying a bundle of firewood on your back and selling it is better for any of you than begging for money that he may or may not get.” Also reported by Al-Bukhaari from a narration by Az-Zubayr ibn Al-`Awwaam (RA).

Islam encourages business, trade and self employment. Did you expect that Islam and capitalism have something in common? This is one aspect of pre-Islamic era that Islam has approved and encouraged.

The perils of the wrong mindset

Monday, July 8th, 2013

Brother,

I understand that riba (usury) is wrong. I understand that riba is like gambling. I understand that there are many views on insurance.

But, I need to have a fundamental understanding of why speculation is wrong. I know we have to work for our money.

I need to have the sin explained to me. Trust me I have done my share of reading on the matter. Yet, I do not have the basic definition of the sin of riba and gambling and it seems that they share the same root.

Indeed they do, and the Quran calls it Al-Maysir. The word means tools for easy gain.

It is not the ease that is wrong though. It is the belief in it. The central point, IMHO, is what you alluded to when you said that we have to work for our money. The biggest problem with all games of chance, and speculation is one of them, is that they set the wrong mindset. They entice people to believe that there is a shortcut out there. That is contrary to the laws of God which state that means, not gimmicks, lead to results. Gimmicks may work sometimes, or else no one would have ever tried them. But they are short lived and cause more harm than good.

Even Wall Street knows that, or at least they used to. When you open a trading account, you have to sign forms that can fill a book. Forms to explain to you the risks involved, some may even exceed the value of the entire portfolio! When you open an investment account, on the other hand, there are far fewer forms to sign. That is because, even though investments too carry risk, they are natural risks, whereas speculative risks are random. The difference between the two is that investments involve an asset: property, product or service, while speculation is a bet on how such investment will do. In financial circles this is called a derivative. We all know from the global financial crisis of 2008, the extent of harm speculative derivatives can do.

That is the peril of the mindset that is convinced that there is a shortcut to riches that requires no work, no sweat, and no asset. There is no such thing, but speculators won’t accept that disappointing conclusion, just like a gambler keeps telling himself that the next time he will recoup all his losses.

Investments can be win-win affairs, while speculation is always a zero-sum game.

Usury fits that profile too. It stems from the wrong mindset that treats money as a commodity and thus finds what it thinks is a great business model: buy money cheap and sell it for more. That’s right; economists actually call interest the price of money! Money is price, it doesn’t, and shouldn’t have a price.

While you did not ask it, other readers may be wondering: how else can an economy run? How can banking be done without interest? How does an Islamic system finance start-up companies or real estate purchases, etc.?

The answer is quite simple: partnerships. A financier may decide to finance a project in return for a percentage of its equity and profits. But that also means sharing the risk. That is a natural mechanism in the law of God that makes a financier scrutinize the project like his networth depends on it. The result is that frivolous projects won’t find financing, but quality ones will. Mortgage lenders would never lend money to home buyers whom they are almost sure cannot repay the loan, which is what caused the foreclosure crisis of 2008. On the flip side, rich people will still put their money in worthwhile and promising projects, which by their nature benefit a lot more people than the stakeholders.

That, in a nutshell, is Islamic finance. It brings wealth to investors and far reaching benefits to society, advancement of the economy and, most important of all, the right perception of money and finance. It is not a game for clever quants to play, it’s life enhancement for millions of people.

I apologize for not having a MBA. Your response was detailed, as usual. However, I need to go to a simpler and deeper understanding.

My question thus becomes this: How does interest oppress those who are the meek and poor. How is usury a tool of the oppressor.

In other words how is this haraam (forbidden). On a grand scale I see the consequences of poor decision making, giving loans to those who do not have the means of paying back thus leading to bankruptcy. But break it down for me.

For example the issue of adultery is simple to understand as it does destroy the fabric of the family.

I am not trying to be stubborn or argumentative. I need to be able to place my finger on the essence of the sin of interest.

Many people question why adultery is a sin. If the reason is, as you stated, that it breaks up families, then divorce should also be a sin, because it too breaks up families. But it isn’t. It is only strongly discouraged.

Many scholars, past and modern, have attempted to find material reasons why adultery is a sin. Some postulated that it results in paternity uncertainty. If that’s the reason, then modern science can solve this problem with a DNA test. Would that make adultery OK? Of course not.

Some suggest that the reason is unwanted pregnancies. If that’s the reason, then foster homes can solve this problem. Does that make adultery OK. Of course not.

Some guess that the reason is sexually transmitted diseases. If that’s the reason, then immunizations and other protections can take care of this risk. Would that make adultery OK? Of course not.

The interesting thing is that God already told us why adultery is a sin. He says in the holy Quran, “And do not approach fornication; it is a debauchery and a wretched path.” (17:32). It sets a wrong mindset. It makes people view sex, women and marriage differently from God’s moral law. That is what makes it a sin. Sin is violation of God’s law. God designed His laws for maximum benefit to mankind. When man breaks God’s law, it is an objection to God. Adultery sets the sinner on an evil path because he is deviated from the Straight Path and is distanced from God and becomes an easy prey to Satan.

You will observe the same about other sins prohibited in the Quran. Intoxication and unearned gain are prohibited in 5:90. God explains why in the next verse, “Satan only wants to sew between you enmity and hatred with intoxicants and unearned gain, shun you from the remembrance of God and from prayer. Are you ceasing?” (5:91)

God doesn’t say that intoxication can ruin your liver, or that it may endanger other people when you drive drunk. God doesn’t say that gambling can wipe out one’s life savings. God doesn’t mention that both are addictions that are very hard to be free from. God’s reasons are moral. Other material reasons may apply, but they are not why something is a forbidden sin. Intoxication sets a wrong mindset. It makes a person “drink to forget” his problems, instead of heading them on and solving them, gaining strength of character and wisdom in the process. Unearned gain sets the wrong mindset. It makes a person view others as “marks”, to borrow from con artists vocabulary. The right mindset that Islam encourages is that others are fellow human beings, dignified, worthy of respect and care, and having full capacity to be good and contribute to positive human progress.

The sin of interest is that it sets the perception and belief that you can have your money work for you instead of you working for your money. The Prophet (PBUH) said, “None of you would eat better food than food he earned by the work of his hands. God’s prophet David, upon him be peace, did.”, narrated by Al-Miqdaam ibn Ma`dikarib and reported and rated authentic by Al-Bukhaari.

I find it fascinating that God quotes people who have argued that usury is like trading. He does not refute their argument! Instead, He states unequivocally that He made trading lawful and usury unlawful (2:275). God doesn’t want us to be distracted by arguments why something He forbade is bad for us.

I beg you to help me with this. Where do trust funds find themselves. And what is the difference in Islam between a trust fund and inheritance?

Trusts are called Waqf in Islam. The word means holding an asset from being sold or donated and dedicating its income and facilities to designated people or purpose.

Waqf has two types: (1) Waqf Khayri (charitable trust/endowment) and (2) Waqf Ahli (familial trust). The first type is very highly praised in Islam. The Prophet (PBUH) has famously said, “All the work of a child of Adam ceases with his death, except three: an ongoing charity, a knowledge that benefits and a righteous child who prays for him.” Narrated by Abu-Hurayra and reported and rated authentic by Muslim. This has motivated multitudes of Muslims throughout the ages to found thousands of charitable projects and endowments. The result was that nearly all needs of society were taken care of without the government having to do any of it! A stranded traveler knew that he can find a hostel where he could stay the night, warm and safe, at no cost. Orphans and widows didn’t have to be scared or hungry. Desert travelers knew there would be plenty of water wells they could drink from.

Waqf Ahli, on the other hand, has been controversial for a good part of a century now. It is banned by many Muslim countries, such as Turkey, Syria and Egypt. The reason is that they saw much abuse of it. They saw it as a way to concentrate wealth in a family, instead of letting it into the economy. Many people used it as a way to circumvent inheritance law. With familial trusts, they could favor some relatives over others, whereas inheritance law fixes heir eligibility and distribution amounts of an estate.

IMHO, abuse of a system is no reason to ban it, but rather is reason to regulate it. Waqf Ahli has been allowed, even suggested, by the Prophet (PBUH) when one has needy relatives, as has been reported about Abu-Talha dedicating his best garden to his poor relatives after he heard this verse, “You shall not attain godliness until you spend from what you love” (3:92). It is a good way to take care of one’s poor relatives while one is still alive, as well as after he, the trustee, dies. That is the difference between trusts and inheritance. The other difference is what I mentioned above about allotment of shares and designation of beneficiaries.

Nobody ever owns the asset under Waqf and the trustee’s heirs are supposed to carry on the upkeep of the trust. Perhaps that’s why many Waqf assets were neglected to the point of deterioration. That was another reason governments moved to ban them. It would’ve been better IMHO if governments took over the maintenance.

Is paying Jizya a sign of disgrace?

Sunday, May 15th, 2011

The Jizya verse, 9:29, says that the people of the Book have to be fought until they pay the Jizya in humility. Is paying Jizya a sign of disgrace?

That is not what the verse says. It says that citizens of a Muslim country, who are Jewish or Christian, must pay a defense tax called Jizya, and if they refuse, the authorities may fight them until they do. That is not a sign of disgrace, it’s a citizenship duty. That is the same law all countries use to collect mandatory taxes from their citizens. In the USA, for example, Federal Marshals are authorized by law to fight, with guns if necessary, any citizen who refuses to pay taxes.

That is simply being fair to the other citizens. Muslim citizens are not only required to join the army at time of war, but they also pay Zakah (mandatory alms). Non-Muslim citizens are exempt from military service and from Zakah. Jizya is what they have to pay in equivalence to Zakah.

The word God uses in 9:29 does not mean disgrace, it means humbled, as in surrendering to the authorities. The law of the land has to be followed by all citizens equally.

He died before paying Zakah

Wednesday, April 20th, 2011

My father passed away and left us inheritance. He did not pay Zakah on his money for several years. Can we his children pay the Zakah for him? How much would that be? I assume if we do, we have to deduct it from the estate before it is distributed to heirs?

Another problem is that part of the inheritance is in certificates of deposit that pay interest. That is haraam (forbidden), isn’t it? What do we do with the interest portion of the inheritance?

Zakah is an obligation that must not be skipped. You certainly can pay it for him. A man came to the Prophet (PBUH) and said to him, “My sister vowed to perform the pilgrimage but she died before she could do it. Can I perform it for her?” The Prophet (PBUH) answered, “If she owed money, would you pay it for her?” He said, “Certainly.” The Prophet (PBUH) said, “Debt owed to God has more priority!” Narrated by Abdullah ibn Abbaas (RA) and reported by Al-Bukhaari. Similar hadeeths have been reported by Muslim about making up for a deceased mother’s missed fasting. The analogy clearly applies to Zakah equally.

If your father, may God have mercy on him, kept financial records, you may be able to figure out what his networth was each of the years he did not pay the Zakah and deduct 2.5% of it. The financial records for the CDs are available from the issuing financial firm. You can deduct the interest and donate it, but keep the face value of the CDs.

If you cannot estimate his networth in those years, you can use the latest networth for your calculations.

Finally, and I’m sure you’re doing this already, pray to God to forgive your father for neglecting the Zakah and ask Him to accept your compensation for it. May God bless your family.

Can I pay off debts with lottery money?

Monday, April 11th, 2011

I won some money in a lottery. I know I know it’s haraam (forbidden), but my family and I have accumulated debts and this money comes in handy. Can I use it to pay off our debts? Please say yes!

You may be glad to know that a number of scholars have said yes. Among them are Sheikh Muhammad Al-Munajjid. His rationale is that getting rid of ill-gotten money is necessary and the only proper way he sees to do that is charity and he extrapolates that to debt payoff, based on rulings of Ibn Al-Qayyim and Ibn Taymiya, may God bless their souls.

I agree with the reverend Sheikh on the charity part, but respectfully disagree on the debt payoff part. I don’t see the analogy between charity and debt payoff. If you have dirt in your house, you wash it away; you don’t move it over to your neighbor’s house! Giving away the money is like returning stolen property, but using it to pay debts off is, IMHO, like stashing stolen money with someone else!

Bear in mind that when we stand before God for judgment in the Hereafter, He will ask each of us two questions about our money: (a) How did we earn it, and (b) how did we spend it.

God knows best.

Is bank interest allowed in Islam?

Sunday, April 3rd, 2011

What about the interest on Provident Fund? That is the ultimate saving of a salaried class. Monthly contributions are made to this out of salary on which the government credits interest at 8-10%. Limited withdrawal is conditionally allowed.

And what about taking loan from banks for the purpose of purchasing a house (when there is no other way left)?

This issue has been in debate for quite sometime and is not really settled. The reason it is complicated is because it is not quite similar to the definition of Riba (usury) as agreed about in Islamic literature. Forbidden Riba is defined this way: A lender asks the borrower for the principal at the time of repayment. The borrower says he can’t pay and asks for a reprieve. The lender gives him a reprieve but adds an arbitrary amount to the loan.

Such arrangement does not exist today, not even among loan sharks! Even they tell the borrower before they lend him the money how much the interest will be.

So, does that mean that interest on bank deposits is OK? The scholars who do not see a similarity between interest and the formal definition of Riba, do not see a reason to forbid bank interest. Those who equate bank interest with Riba forbid it.

What complicates matters more is the fact that the monetary systems of today differ sharply from the old days. Back then gold and silver were the only money. Their value does not decrease with time. In today’s economy (since 1971), money is fiat currency not backed by gold. With the massive debts of just about every country, paper money is almost worthless, and decreases in value with time. A lender who gets back his principal only is losing money!

The reason Riba is prohibited in Islam is to prevent rich lenders from taking advantage of the needy. We’ve seen in human history many examples of entire countries enslaved because of their debts.

If you now understand the complexity of the issue and the fact that scholars are not in agreement on it, you can decide for yourself whether to apply for an interest-bearing loan. IMHO, a financial transaction whose conditions are transparently spelled out in a legal document signed by both parties without duress, and where no injustice is suffered by either party, cannot reasonably be wrong. I suggest, however, that you consult your Imaam and make your decision afterward and after much contemplation, because Riba is a severe sin.

I didn’t understand why buying a house is a necessity. You can always rent.

Islamic economic theory and finance

Thursday, February 17th, 2011

Can you tell me briefly what is Islam’s view of economic theory and finance?

Money, in Islam, is a means and not a commodity. So, there is no price for money. And because gold and silver (or checks fully backed by them) are the only valid money, there is no price for time. Exchanging gold and silver must be “same metal, same weight, same time, hand-to-hand.”

Islamic finance has two primary vehicles: partnerships (Mushaaraka), or interest-free loans (Qardh Hasan). Under the banner of partnership are many financing techniques, such as leases (Ijaara), equity participation (Sharikaat), venture capital (Mudhaaraba), profit sharing (Muraabaha), stocks, etc. With partnerships, a financier puts up the money and the investor or business person puts up the work (aka sweat equity). They share equally in the profits and in the loss. This way a financier will never part with his or her money financing a bad business idea or unpromising project. Non-Islamic lenders do that with ease because they can repossess the investment, or sell the loan in the secondary market, or be bailed out by the government!

Why is interest on money forbidden in Islam?

Saturday, February 27th, 2010

Islam prohibits it because in Islam, time is NOT money. Money is not a commodity to be bought and sold, which is what usurers do. Money is a means by which to acquire property or investments. In Islam, legitimate profit is one gained from merchandising actual products and services, or appreciation of investments. Money does not appreciate.

To understand this better, consider that the only money in Islamic finance is gold and silver. If you compare the value of the dollar, for instance, with the price of gold, you will notice a remarkable reverse relationship! What cost a gold Dinar a thousand years ago, still costs pretty much a gold Dinar today