Interest-Bearing Transactions in the U.S.

1. Interest-Bearing Transactions in the U.S. Dr. Main Al-Qudah Assistant Professor Islamic American University

2. Introduction 1 • The only sin in the Quran in which Allah(SWT) and His Prophet (PBUH) are declaring war against those who commit it. (يا أيها الذين امنوا اتقوا الله وذروا ما بقي من الربا إن كنتم مؤمنين،فإن لم تفعلوا فاذنوا بحربٍ من الله ورسوله،وإن تبتم فلكم رؤوس أموالكم لا تظلمون ولا تُظلمون)

3. Introduction 2 • Allah (SWT) and His Prophet (PBUH) curse those who are involved in usurious transaction. • (لعن الله اكل الربا ومؤكله وكاتبه وشاهديه) • (لعن رسول الله صلى الله عليه وسلم اكل الربا ومؤكله وكاتبه وشاهديه،وقال:هم سواء) • Taking Riba and giving it to others are the same !even witnesses and the one who documents the usury are cursed too !

4. Introduction 3 • Dealing with Riba is one of the seven major sins, where the Prophet (PBUH) was warning His nation from committing them: • اجْتَنِبُوا السَّبْعَ الْمُوبِقَاتِ قَالُوا يَا رَسُولَ اللَّهِ وَمَا هُنَّ قَالالشِّرْكُ بِاللَّهِ وَالسِّحْرُ وَقَتْلُ النَّفْسِ الَّتِي حَرَّمَ اللَّهُ إِلا بِالْحَقِّ وَأَكْلُ الرِّبَا وَأَكْلُ مَالِ الْيَتِيمِ وَالتَّوَلِّي يَوْمَ الزَّحْفِ وَقَذْفُ الْمُحْصَنَاتِ الْمُؤْمِنَاتِ الْغَافِلات

5. Introduction 4 • American's economy is a Capitalist economic system in which Riba is a built-in pillar in this system, and structured in a way that it is hard to be avoided. • Difficulty of having balance between living in America, conducting business, transacting from one side , and avoiding Riba from the other side.

6. Introduction 5 • However, living in a non-Muslim country does not allow Muslims to be involved in any usurious transactions. • The difficulty of avoiding Riba can NOT be taken as a justification to permit it, because it could be avoided. • Transacting with Muslims or with non-Muslims in usurious transactions are the same, both are prohibited.

7. Transactions at a glance 1-Bank Loans 2-Late Fees or Charges 3-Credit Cards (unsecured cards) 4-Security deposit credit card 5-Debit Card 6-Saving Account

8. 7-Checking Account 8-Financing 9-“lease to purchase” option. 10-Charging an employee when withdrawing from his 401(k) plan 11-Investing In (401)K Plan

9. 12-Buying a house via conventional mortgage 13-Late registration fees 14-Status of money generated through usurious transactions before repentance.

10. 15-Monetary Gifts 16-Non-Monetary Gifts 17-Saving Plan 18-Cashing checks 19-Warranty purchases

11. 20-Facilitating prohibited transactions for non-Muslim customers . 21-Online currency exchanges. 22-Membership fees. 23-Student loans.

12. 1- Meaning of Usury (Riba) • Usury (Riba) in Arabic lexicography: Excess,addetion, increase ,to add. Example from the Quran ”ويربي الصدقات“ • In Islamic jurisprudence: increase or delay in specific assets (liquid or non-liquid) in specific transactions. الزيادة أو التأخير في أموالٍ محدودةٍ في معاملاتٍ محدودةٍ

13. 2- The two kinds of usury: A - Riba of increase ربا الفضل: When the amount paid back exceeds the original debt or, gaining any benefit out of the debt B - Riba of delay ربا النساء: When the payment is delayed or deferred after its due date.

14. 3- Usurious Transactions Interest-bearing transactions might occur in only two different transactions in Islam: • Loan contractعقد القرض • Sale contractعقد البيع

15. 4- How Does Usury Occur in Loan Contracts ? A-Riba of increase: If the lender stipulates extra money by the borrower-either when he pays on time or when he delays his payment--this is “riba of increase ربا الفضل” . This includes even the stipulation of providing help, service, a gift, food or anything because of the loan - A well known rule: “any loan that derives stipulated benefit is usury.” كل قرض جر نفعا فهو ربا

16. B- Riba of delay: If the borrower delayed his payment after receiving a loan, this is riba of delay. But since the purpose of a loan contract is to help others, and it’s among non-profit contracts (عقود التبرعات)where profit is not intended, as in “charity, lending, will …” contracts; this kind of riba is exempted and absolutely lawful. Rather the lender is anticipated to be rewarded because lending to others is an obedience and a good deed.

17. 5- How Does Usury Occur in Sale Contracts? • Usurious sale is limited to two items only: money and food. • To avoid interest, the following conditions must be satisfied: A- Trading in the same category and the same item, like rice for rice, wheat for wheat, American dollars for American dollars and Jordanian dinars for Jordanian dinars. There are three conditions:

18. Equality التماثل: It should be the same amount, to avoid Riba of increase. • Mutual Submission التقابض: It should be exchanged at the same time, to avoid Riba of delay. • Finalization “ الحلول”: The completion of the transaction without deferring to the future (in other words, it has to be effective immediately).

19. B- Trading in the same category but with different items: like rice for sugar, American dollars for Jordanian dinars, etc. This has to satisfy two conditions: • Mutual submission التقابض“” • Finalization “الحلول” Equality is not required .

20. C- Trading in the two different categories (money and food): Like American dollars for rice, Jordanian dinars for sugar, etc. Only one condition must be satisfied: At least one of the two items must be submitted during the contracting. نهى رسول الله صلى الله عليه و سلم عن بيع الكالئ بالكالئ

21. D- Trading in a non-usurious assets: In this case, at least one of the two assets is a non-usurious asset: “A car for a house, a house for a land, or money for a house.” There is one stipulation: one of the two items must be submitted while contracting for the same reason mentioned above, which is the prohibition of contracting without submitting one of the traded items.

22. If any of the aforementioned conditions are not completely fulfilled, then the transaction is an interest-bearing contract, and it’s definitely prohibited. • Usurious sale “ربا البيع” is less common today than it was before.

23. 6-Different levels of prohibition • Usury of increase (ربا الفضل) is less prohibited than the usury of delay. It is prohibited because it leads to the usury of increase (ربا النسيئة) • Usury of delay (ربا النسيئة) is prohibited by itself. • قال صلى الله عليه وسلم ”لا تبيعوا الدينار بالدينارين ولا الدرهم بالدرهمين ولا الصاع بالصاعين فإني أخاف عليكم الرما“ • والرما في الحديث هو ربا النسيئة

24. 7-Why Islam prohibits Usury? • If the debtor suffers a loss, it is unjust for the creditor to claim a fixed rate of return. • If the debtor earns a very high rate of profit, it is unjust for the creditor to take a small proportion of the profit. • The creditor did not exert any effort to be entitled to profit. • Usury and injustice are synonyms !!

25. Practical Examples 1- Bank Loans: Borrowing with a predetermined lump sum or percentage to be paid by the borrower is an interest-bearing loan. The prohibition of this kind is declared in the Qur’an and the Sunna ”يا أيها الذين امنوا اتقوا الله و ذروا ما بقي من الربا إن كنتم مؤمنين“ ”لعن رسول الله صلى الله عليه وسلم اكل الربا، وموكله ، وكاتبه،وشاهديه،وقال هم سواء“ Borrowing to invest or to purchase does not change the rule.

26. 2- Late Fees or Charges: Any late fees paid out of the loan, utility bill, deferred payment sale, payment plan (paid on monthly basis) is riba. A Muslim must make sure to pay on time to avoid involving himself in any interest-bearing activity.

27. 3- Credit Cards (unsecured cards): a- Definition: A credit card is a contract between a credit company and a client that allows the client to borrow money either by withdrawing cash, or using the card to pay bills as well as make purchases.

28. b- The contract-some times- indicates the obligation of paying extra money by the client in case of: • Delayed payment (one time payment). • Cash withdrawal (when withdrawing from the ATM machine of the credit company).

29. Payment plan (on a monthly basis -settlement). • Purchasing from over-seas (out side the unites states) c- The above condition is a usurious condition. Agreeing to this condition is prohibited.

30. d- Scholars differentiate between two kinds of prohibited matters: • حرام لذاته prohibited by itself, like paying riba for others, taking it from others, adultery, drinking alcohol, etc. • حرام لغيره prohibited because of its consequences, like agreeing to pay late fees (without paying it yet).

31. e- The reason behind this classification is that: whatever is prohibited by itself would be permitted in case of necessity, while what’s prohibited because of its consequences becomes permissible in case of true and public need.

32. f- In our example, a “credit card” is a true and public need in general to build a good credit history. Having a good credit is essential to facilitate daily transactions in the U.S.

33. g- Based on the above conclusion, having a credit card is permissible under the following conditions: • Reaching a stage of a real need; • Abstaining from withdrawing cash from the credit company if it is a chargeable service; • Paying bills in full before the due date; • Refraining from using it when having a sufficient “credit scores.”

34. h- When it comes to annual fees, then these fees are considered as a service charge, because it is not affiliated with using the credit card. So it is allowed to pay it. i-Some credit companies charge a percentage even without delaying the payment. Having a credit card through these companies is prohibited.

35. J-Paying service fees for (cash withdrawal) from any ATM machine does not belong to the same credit company of the client is permissible, because the new company is not the lender of the client (the borrower in this case), rather they save his time by withdrawing the money on his behalf from his original company , and charging him because of this service . (عقد وكالة)

36. K- A credit company does not pay the full amount to the merchant when its client uses his credit card for purchasing, it deducts(1 or 2%) justified as a (service fee). • The above is one of the ways credit companies make money.

37. Since the three parties (the merchant, the client, and the credit company ) know and agree on that in advance ,and this deduction is in the opposite of usury, then it is lawful. • Deducting a lump sum or a percentage is the same, both are permitted.

38. L- Credit transfer: Transferring debt from one credit company to another is a chargeable service . The new company would charge the client (0% APR) for the debt, but thereis a transfer fee . This fee is Riba because the new company is the lender, and the paid-back money should not exceed the original debt.

39. 4- Security deposit’s credit card (secured card): a- It’s a credit card, the only difference is that it is issued for those who don’t have sufficient scores or do not have a credit history. The same rules applied for non-secured credit cards are applied here. b- A Muslim client might receive extra money (interest) with a deposited amount without taking his permission after the expiration of his secured credit card. This extra money is riba. - The rule in this case is that the extra money must be spent for Muslim public benefits (Masajid, Islamic schools,… etc.)

40. 5- Debit Card: a- It is an easy way to withdraw from the client’s checking account. b-Annual fees are allowed. c- Service fees for withdrawing cash are allowed too.

41. d- Using it is allowed as long as the depositor has sufficient funds. e - Withdrawing via debit card without having sufficient fund would result in an overdraft charge, where the bank would pay the money on behalf of its client ,and then charge him the original amount plus the (over draft charge), which is riba.

42. F-Multiple card (Credit and debit): • Basically, it is a debit card which can not be issued for those who do not have checking account. • It helps delaying the payment if it is used as a credit, as will as allowing the purchaser to use it in any point of sale where the debit card is not accepted. • It has the same rules of the debit card.

43. 6- Saving Account: a- A pre-determined percentage of interest is given to the client when opening such an account. b- This percentage is Riba, and it’s unlawful. c- Spending this extra money for Muslim public benefits does not change the rule because of the absolute prohibition of such a contract, regardless of the pre-intention of getting rid of this prohibited extra money.

44. D- Protecting money against (Identity theft) could not legitimize having a saving account . • The alternative is to have another checking account without using it for purchasing or paying bills, only to save the money. • Using the new checking account will publicize its information, and eventually being subject to Identity theft.

45. 7- Checking Account: a- A public need to secure money and facilitate daily transactions. b- Usually, banks use a percentage of the deposited money to lend to other clients with interest and without taking the permission of the account holder.

46. c- Indirectly, all account holders help banks to conduct interest-bearing activities. But because of the need and lack of a viable Islamic substitute, having a checking account is permissible. d- A Muslim client should make sure to have interest-free checking account, since some banks offer interest even on the checking account.

47. d- In case of having Islamic banks, a Muslim is prohibited from having a checking account in any conventional bank, ومن يشفع شفاعة ً سيئة ً يكن له كفل ٌمنها meaning, “Whoever participates in conducting bad deeds ,will share in the punishment.“

48. 8- Financing a- Offering two different prices for the same commodity based on the duration of the payments is permissible, as long as the two parties come up with an agreement on one of the two prices. b- This permissibility is stipulated with three conditions: • The two parties have to agree upon only one of the two options. • No third party is allowed to finance. • No late fees are allowed.

49. c- Purchasing through a third party in the U.S means that the third party—i.e. bank, credit company, etc. would pay the amount on behalf of the buyer and eventually charge the original amount plus a percentage. This transaction is an interest-bearing loan. d-Car Dealership & Finance Department of the same company (i.e. Honda or Toyota) are two different entities. If one of them filed for bankruptcy, the other one will keep operating normally.

50. e- Buying through a (0%APR) finance is permissible. It means that the client is borrowing a free of interest loan. f- Even in case (0% APR) is not available, usury could be avoided by paying a down payment to make it 0%. Eventually, it becomes permissible. # Make sure the loan you take after the down payment is 0% interest loan .