– The Islamic Prohibition of Usury and its Modern Implications
for Muslims and Banking
LeRoy Nosker Tanner
University of Wisconsin – Eau Claire
Major Points
 The definition of terms
 The origination of the prohibition on usury in Islamic
countries
 The central banking & financial markets
 The implementation of monetary policy
 How do Muslims adapt to the western banking
system?
Western Banking-Historical Roots
Economic Standpoint
 When?
 Where?
 How?
 Who?
 Why?
Religious Standpoint
 Jewish Laws
 In the Torah
 Pope Innocent III
 Prohibition on Christians
 Forced involvement for Jews
 Britain and the Crusades
 Practice of ransom
Usury
 Definition
 “interest paid for the use of(loaning) money”
 Application
 Business transactions
 Banking of money
 Reparations
Riba?
 Definition
 A forced “increase of value” in “the medium of
exchange” that is loaned or swapped
 Interpretation
 Debated
 Why is it mentioned?
 Historical setting

Arabia in the 7th Century C.E.
Riba in Sacred Text
 Qur’an
 Origins
 Meaning for Muslims
 Verses dealing with Riba
 Hadith
 Origins
 Isnad
 Meaning for Muslims
 Reports dealing with Riba
Gharar
 Transactions
 Knowledge

“hidden knowledge”
Shared or known only by one?
 Asymmetric information
 Intention

Is the knowledge necessary for an equitable transaction?
 Penalties


Legal
Religious
Source of the Prohibition of Usury
 Ulema
 Religious Scholars
 Ijma
 Shari’a
 Fatwa
 Where is it politically instituted?
Fiqh-Government Application
 “Jurisprudence”
 Political vs. Religious law
 What’s the distinction?
 Is there a distinction?


Hakimiyyah
Ummah
Shari’a Economics
 Basis
 Shari’a
 Qur’an
 Hadith
 Main Questions
 How do I avoid usury and gharar, but still stay in
business?
 How do I grow my business and help my consumers
without using usury or gharar?
Banking under Shari’a
 Wadiah
 2 Main Contractual Principles
 Profit Sharing
 “Rent to Own”
 Checking
 Savings, Investments & Loans
 6 methods for avoiding usury and gharar






Mudarabah
Musharakah
Bai Murabahah
Bai Bithaman Ajil
Bai Inah
Ijarah
Central Banking?
 What does a central bank do?
 Maintain financial stability
 Banking regulation and monetary policy
 Does it apply for Islamic Banking?
 Yes!
 How is monetary policy conducted?
 Saudi Arabia
 Turkey
Inflation Rates
Comparative Inflation Rates from 1999-2009
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1999
2000
2001
2002
2003
2004
2005
2006
-0.1
Saudi Arabia
Turkey
United States
2007
2008
2009 (to
date)
Stock Markets
Comparative Stock Market Indices from 1999-2009
50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
1999
2000
2001
2002
2003
Saudi Arabia
2004
Turkey
2005
2006
United States
2007
2008
2009 (to
date)
Muslims in the U.S.
 Muslim Population in the U.S.
 ~6 million

0.6%
 How do they adapt?
 Credit cards?
 Loans?
 Bank accounts?
Further Research
 Statistical data on number and types of loans given out
by Islamic banking institutions
 Expanding the number of countries included in the
comparison to better represent the actual usage of
Islamic Banks by Muslims across the world
 Survey data of Muslim Americans discussing their
personal relation to this principle