Editing Islamic banking and finance (section)

===Scriptural basis===

{{further|Riba}}
The [[Sharia]] law that forms the basis of Islamic banking is itself based on the [[Quran]] (revealed to the Islamic prophet [[Muhammad]]) and ''a[[hadith]]'' (the body of reports of the teachings, deeds and sayings of the Islamic prophet [[Muhammad]] that often explain verses in the Quran).<ref>{{Cite web |title=Sales and Trade - Sunnah.com - Sayings and Teachings of Prophet Muhammad (صلى الله عليه و سلم) |url=https://sunnah.com/bukhari/34 |access-date=2023-07-19 |website=sunnah.com}}</ref>
Prohibition of ''[[gharar]]'' is based on ''ahadith'' declaring as forbidden ''gharar'' the sale of things like "the birds in the sky or the fish in the water".<ref name="el-gamal-2001-2">{{cite web |title=An Economic Explication of the Prohibition of Gharar in Classical Islamic Jurisprudence |first=Mahmoud A. |last=El-Gamal |date=2 May 2001 |page=2 |url=http://instituteofhalalinvesting.org/content/el-gamal/gharar.pdf |access-date=4 August 2017 |archive-url=https://web.archive.org/web/20160428043313/http://instituteofhalalinvesting.org/content/el-gamal/gharar.pdf |archive-date=28 April 2016 |url-status=dead}}</ref>{{sfn|Visser|2013|p=53}}{{#tag:ref|Several a[[hadith]], in addition to prohibiting games of chance, prohibit ''bayu al-gharar'' (literally "trading in risk",<ref>{{cite web|url= http://www.muslimummah.org/articles/articles.php?itemno=208&&category=Islamic%20%20Finance |title=Basic Principles of Islamic Finance |website=muslimummah.org|access-date=12 February 2015 |url-status=dead |archive-url= https://web.archive.org/web/20141219130819/http://www.muslimummah.org/articles/articles.php?itemno=208&&category=Islamic%20%20Finance |archive-date=2014-12-19}}</ref>{{better source needed|date=February 2021}} defined as sales in which gharar is the major component).<ref name=el-gamal-2001-3/> Jurists have distinguished between this kind of gharar, and ghasar considered minor (''yasir'') and so permissible (''[[halal]]''),<ref name=el-gamal-2001-3>[http://www.ruf.rice.edu/~elgamal/files/gharar.pdf An Economic Explication of the Prohibition of Gharar in Classical Islamic Jurisprudence] | Mahmoud A. El-Gamal | First version: 2 May 2001</ref> but disagree over what constitutes ''gharar'' that is minor and ''gharar'' that is substantial, (at least according to one source, Abu Umar Faruq Ahmad),<ref name="TaPoMIF-98-9">{{cite book|url=https://books.google.com/books?id=wRlI0nJp5mEC&q=%22Gharar+is+where+the+buyer+does+not+know+what+he+bought%2C+or+the+seller+does+not+know+what+he+sold%22&pg=PA99 |title=Theory and Practice of Modern Islamic Finance: The Case Analysis from Australia|date=2010 |publisher=Universal-Publishers|pages=98–99 |last1=Abu Umar Faruq Ahmad|access-date=17 May 2017|isbn=9781599425177}}</ref> 
have not agreed on an exact definition of the meaning and concept of ''gharar''.<ref name="AL-SUWAILEM">{{cite journal|title=Towards an objective measure of ''gharar'' in exchange |journal=Islamic Economic Studies|volume=7|issue=1, (October 1999); 2, (April 2000)|pages=61–102|last1=Al-Suwailem |first1=Sami |url=http://www.irti.org/English/Research/Documents/IES/119.pdf |access-date=1 August 2016|archive-url=https://web.archive.org/web/20170816233704/http://www.irti.org/English/Research/Documents/IES/119.pdf |archive-date=16 August 2017|url-status=dead}}</ref>|group=Note}} ''[[Maisir]]'' is thought to be banned by verses 2:219, 5:90, and 91 in the Quran.{{sfn|Visser|2013|p=53}}

However, "the Islamic evaluation" of modern banking centers around the definition of interest on loans<ref>{{Cite book|url=https://books.google.com/books?id=OZqJAAAAMAAJ|title=Muslim Economic Thinking: A Survey of Contemporary Literature|last=Siddiqi|first=Muhammad Nejatullah|date=1981|publisher=International Centre for Research in Islamic Economics, King Abdul Aziz University|isbn=9780860370819|pages=29|language=en}}</ref> as ''riba.'' Twelve verses in the Qur'an deal with ''riba'', the word appearing eight times in total, three times in verses {{qref|2|275|pl=y}}, and once in {{qref|2|276|pl=y}}, {{qref|2|278|pl=y}}, {{qref|3|130|pl=y}}, {{qref|4|161|pl=y}} and {{qref|30|39|pl=y}}.<ref name="RBIRPMNS2004:35">Siddiqi, ''Riba, Bank Interest'', 2004: p.35</ref> ''Riba'' is mentioned numerous times in ''a[[hadith]]'', including Muhammad's [[Farewell Sermon]].

A number of orthodox scholars point to Quranic verses (2:275–2:280) as declaring ''riba'' "categorically prohibited" and "unjust" (''zulm''), and defining it to mean any payment "over and above the principal" of a loan.<ref name="RBIRPMNS2004:36">Siddiqi, ''Riba, Bank Interest'', 2004: p.36</ref><ref name="mufti">{{cite web|last1=Seifeddine|title=Surah al-Baqarah, 275–281|url=http://www.muftisays.com/blog/Seifeddine-M/2093_11-10-2011/surah-albaqarah-275281.html|website=muftisays.comm|access-date=14 April 2015|archive-url=https://web.archive.org/web/20150401132438/http://www.muftisays.com/blog/Seifeddine-M/2093_11-10-2011/surah-albaqarah-275281.html|archive-date=1 April 2015|url-status=dead}}</ref> (Although at least one source states "it is commonly argued" that ''riba'' is "defined by hadith".)<ref name="MOFRI6H2009:105">Farooq, ''Riba, Interest and Six Hadiths'', 2009: p.105</ref>

{{Blockquote|text=Those who consume interest will stand ˹on Judgment Day˺ like those driven to madness by Satan’s touch. That is because they say, “Trade is no different than interest.” But Allah has permitted trading and forbidden interest. Whoever refrains—after having received warning from their Lord—may keep their previous gains, and their case is left to Allah. As for those who persist, it is they who will be the residents of the Fire. They will be there forever. <br />Allah has made interest fruitless and charity fruitful. And Allah does not like any ungrateful evildoer. <br />Indeed, those who believe, do good, establish prayer, and pay alms-tax will receive their reward from their Lord, and there will be no fear for them, nor will they grieve. <br />O believers! Fear Allah, and give up outstanding interest if you are ˹true˺ believers. <br />If you do not, then beware of a war with Allah and His Messenger! But if you repent, you may retain your principal—neither inflicting nor suffering harm.<br />If it is difficult for someone to repay a debt, postpone it until a time of ease. And if you waive it as an act of charity, it will be better for you, if only you knew.|author={{qref|2|275–280|c=y}}}}

According to the orthodox, an "increase over the principal sum" in ''loans of cash'' are riba. An increase over the principal sum in ''financing a purchase'' of some product or commodity is another matter. These are ''not'' riba – according to the orthodox interpretation – at least in some circumstances.<ref name="IIBI-murabaha">{{cite web |url=http://www.islamic-banking.com/murabaha_sruling.aspx |title=Q. What is Murabaha? |website=Institute of Islamic Banking and Insurance |access-date=31 August 2016 |archive-url=https://web.archive.org/web/20160831194438/http://www.islamic-banking.com/murabaha_sruling.aspx |archive-date=31 August 2016 |url-status=dead }}</ref> (These are sometimes known as "credit sales".) According to noted Islamic scholar [[Taqi Usmani]], this is because in [[Quran]] aya 2:275 ("they say, 'Trafficking (trade) is like usury,' [but] God has permitted trafficking, and forbidden usury")<ref name="2:275">{{Cite web|url=https://quran.com/al-baqarah/275|title=Surah Al-Baqarah - 275 |publisher=Quran.com}}</ref> "trafficking (trade)" refers to credit sales such as ''[[murabaha]]'', the "forbidden usury" refers to charging extra for late payment ([[late fee]]s), and the "they" refers to non-Muslims who did not understand why if the first was allowed both were not.<ref name="MTUHJI1999:50,51,219">[[#MTUHJI1999|Usmani, ''Historic Judgment on Interest'', 1999]]: paras 50, 51, 219</ref>{{#tag:ref|Monzer Kahf argues that the quranic verse (in 2:275) where non-Muslims complain – "... they say, 'Trade is [just] like interest.' But Allah has permitted trade and has forbidden interest" – refers to credit sales.<ref name=kahf-2007/>|group=Note}} For this reason (according to Usmani) it is ''not'' true that "whenever price is increased taking the time of payment into consideration, the transaction comes within the ambit of interest".<ref name="PCCS"/> Instead of "principal" and "interest rate", the credit taker is paying "cost" and "profit rate".<ref name="IIBI-murabaha"/> (Another difference with conventional finance is that there is no penalty for late payment.){{#tag:ref|Taqi Usmani explains that in such transactions "the whole price ... is against a commodity and not against money" and so "... once the price is fixed, it relates to the commodity, and not to the time". Consequently "the price will remain the same and can never be increased by the seller." If the price had "been against time", (which is forbidden) "it might have been increased, if the seller allows ... more time" for repayment when the bill is past due.<ref name="MTUHJI1999:224">[[#MTUHJI1999|Usmani, ''Historic Judgment on Interest'', 1999]]: para 224</ref>|group=Note}}