CHAPTER ONE GENERAL INTRODUCTION 11 Background of the study Islam is a religion bearing the complete code of human existence whose area of coverage extends to the entire gamut of life‘at the individual, group and society level. The religion of Islam is based on a unique scheme whose aim is to mould and refine individual life in healthy patterns, so that the kingdom of God may be established, and that peace, justice, tranquility and well-being may fill the earth a waters fill the oceans. One of the objects of Shariah'\(Magqasidal-shariah) among other things is to protect and preserve the wealth/property(Mal) of the Muslims, (followers of Islam). Upon this backdrop, Islam laid down an unalterable legal framework regulating the economic activities of its followers, which they are expected tom observe. In this vein, it formulated laws, principles modes and guidelines on transacting businesses which are shariah compliant, while at 'Shariah is an Arabic word which literary means the way to a watering place. Technically, itis the path ‘which all believers must follow in order to attain salvation in this world and in the hereafter. "The others include: life (nafs), progeny (nasb), intellect (aq!) and religion (deen). Nuhu, S.A 2012, Islamic laws of torts Bayero University, Kano. Obtained from Nyazee, IK, 2006, Islamic jurisprudence, Adam. publishers and distributors, New Delhi. 1the same time restricting other forms of financial products which are either speculative (gharar) or with exploitative tendencies. One of such products is riba. Riba is an Arabic term for interest which is akin to the one used in conventional banking operations. Says Muhammad Hanif (2011)'it means charging “...predetermined additional amount on a loan extended based on length of credit period”. In the light of the Holy Qur’an, riba is classified into two groups according to the nature of its transactions: 1. Deferment of'an already existing and due debt of to a new maturity provided the amount of debt is increased; and, 2. Giving a loan that is due with an increment after a given period of time.* Thus, by definition the Qur‘an refers to interest as an increase which is over and above the principal amount in a loan agreement, where it states therein: 3Hanif, M, (2011), ‘Difference and Similarities in Islamic and Conventional Banking’. International Journal of Business and Social Sciences, Vol. 2 No. 2, page 167. ‘*Kahf, M, (2006), Magasid al Shariah in the Prohibition of Riba and their Implications for Modern Islamic Finance’, paper prepared for the ITUM International Conference on Maqasid al Shariah, August 8-10. 2“But if ye turn back, ye shall have your capital sums: deal not unjustly, and ye shall not be dealt with unjustly’, Q2:279. From the aforementioned verse we can safely state that: 1) Riba refers to any increment above the principal of a debt or a loan; and 2) Such an increment by whatever disguise it may take is unjust> At this point, it is pertinent to clarify that the Islamic prohibition on riba does not mean that money and capital would not earn a reward for their legitimate uses’. Says Masood (2004)‘this also does not imply that money and capital would have to’ be provided free of charge. ‘Essentially...’ he continued ‘..,all what is meant is that a form in which such arrangements are possible will no longer be available.” Indeed, what better way to explain this than the Qur’an where it states that: 1 Tk “stasood, WK, (2004), Transition to a Riba Free Economy; Adam publishers and Distributors, New Delhi, page 4. "id 3“... they say: ‘trading is only like usury’ whereas Allah has permitted trading and forbidden usury’ Q2:275, The consensus prevalent among Muslims worldwide throughout history has been, and continues to be, that riba among other things, includes interest®. This unanimous opinion came up as a result of a verdict which was delivered in a number of international conferences of Fuqaha (jurists) which have been held to discuss the question of riba, including the Muw’tamaral-Figh-al-Islami held in Paris in 1951 and in Cairo in 1965, and the OIC and Rabitah-Fiqh committee meetings held in 1985 and 1986 in Cairo and Makkah respectively? Not long ago also, the Federal Shariah Court of Pakistan in a recent case, Mahmood ur Rahman Faisal V Secy. Miny. of Law*held that riba is unlawful and subsequently issued an order that all banks in Pakistan adopt ‘Chapra, UM; (2006), ‘The Nature of Ribain Islam’ The Journal of Islamic Economics and Finance (Bangladesh), Volume 2 No. 1, January-June. "Ibid "© MahmoodurRahman Faisal V. Secy. Miny of Law -FSC, 1992, P. 89. 4Islamic principles in order to eliminate all elements of riba from its operation. On this note, the court also resolved that: a) Any excess of profit on a loan for a deferred payment when the borrower is unable to repay it after the fixed period and similarly any excess or profit on a loan at the time of contract, both are rib ( forbidden in shariah; b) The alternate banks should be established according to the injunctions of Islam to provide economic facilities; c) The academy resolved to request all the Islamic countries to establish banks based on shariah principles to fulfill all the requirements ofa Muslim accord his beliefs so that he may not face any repugnancy."? From the decision above, we can safely understand that the major element that characterizes the conventional banking procedures is riba; and in order for them to conform to the Islamic spirit, riba must be eliminated in the operational workings of the banks. Ali, ER (1.d) ‘Riba and its Prohibition in Islam’Taking Pakistan as a case study here, it is of great significance to succinctly point out that both Pakistan and Nigeria are: a. Shaped by common historical and colonial experience which was a result of British colonial conquest and the subsequent imposition of imperial power that will be used to administer the vast territories of both Pakistan and Nigeria. This was the period that gave birth to the conventional banking system which was introduced by the British imperialists; and b. Both countries consist of a vast population that is made up of a predominantly Muslim population. In his own words, Mustapha (2012)” states that: ‘Nigeria is home to the largest Muslim population in sub-Saharan Africa, with around half of its 150 million population of the Islamic faith.” In the light of the above submissions, I would state here categorically and emphatically even, that the banking atmosphere in Nigeria is not divorced "Mustapha, AM (2012), The Case for the Integration of Islamic Banking Principles into the Nigerian Banking System’. African Journal of social sciences, Vol. 2 No. 2 6from those practices that characterize conventional banking operations around the globe and Nigeria being a predominantly Muslim community accepts the system though with some reservation."This reservation was generated on account of the modus operandi“of the banks that deal with interest which is prohibited in Islam. And the failure of the banks in addressing this problem on the part of their Muslim clientele has generated concerns on the sincerity of the banking institutions in conducting their business and commercial affairs. In the long run hence, the Muslim client (or customer)in particular and other customers in general are fully enmeshed in a whirlpool of economic debt and a financial crisis whose end is by far not in sight as a result of the fraudulent system of this financial predators thus living on the blood and sweat of others that will spend their lives paying the debt to these super structures so called banks, only for their descents to inherit same in an event where the debtor was unable to pay off such debt before his final exit from this world. "bid Mode or method of working of the banks1.25tatement ot Problem The concept of riba is not new in conventional banking system. The banking industry conducts its day-to-day activities (business) on the basis of interest which forms the corner stone of its pool of income. In the second half of the 20' century, liberation of Muslim world from colonial powers almost completed and wide spread renaissance of Islamic ideology took its part in Muslim societies whereby the masses started looking at the existing social systems through Islamic lenses and proposed modifications and developments. The Muslim thinkers and philosophers challenged the world’s ruling economic and_ social systems and uncovered their weakness.In Nigeria, the situation is not different from those obtained in other Muslim countries around the world. According to Adebayo (2011)'* voices raised from various quarters against the flows, shortcomings and exploitation of the conventional financial system clearly indicate that the authors of the system could not redeem the image without resorting to alternative ‘Ibid No. 6 eadebayo, RI (2011), A Study of the Legal and Regulatory Issues of Non-Interest Banking System in Nigeria, Journal of Islamic Banking and Finance, Volume 28, January-March No.1 81.2Statement of Problem The concept of riba is not new in conventional banking system. The banking industry conducts its day-to-day activities (business) on the basis of interest which forms the corner stone of its pool of income. In the second half of the 20" century, liberation of Muslim world from colonial powers almost completed and wide spread renaissance of Islamic ideology took its part in Muslim societies whereby the masses started looking at the existing social systems through Islamic lenses and proposed modifications and developments. The Muslim thinkers and philosophers challenged the world’s ruling economic and _ social systems and uncovered their weakness.!5In Nigeria, the situation is not different from those obtained in other Muslim countries around the world. According to Adebayo (2011)* voices raised from various quarters against the flows, shortcomings and exploitation of the conventional financial system clearly indicate that the authors of the system could not redeem the image without resorting to alternative “Ibid No. 6 Adebayo, R.I (2011), A Study of the Legal and Regulatory Issues of Non-Interest Banking System in Nigeria, Journal of Islamic Banking and Finance, Volume 28, January-March No.1 8financial system devoid of the exploitation tendencies in the former system. This is to say that ‘many Muslims are not satisfied with the operation of the conventional interest-based banking system which is against the spirit of their religion’ (Adebayo, 2010:1).” In almost all discuss on Islamic banking and finance, the subject of interest and its*prohibition tends to surface and dominate the centre stage in such a discussion. But the more such a subject is explored the greater the controyersy that stems out of such circle. The theme hence in this contention is not to say that riba is misunderstood as a concept in Islamic financing but rather how such a ‘forbidden fruit’ would be grappled with in the wake of a fast growing economy in both the Muslim world in particular and the global economy in general thus giving it a more practical flavor in dealing with Muslim socio-economic realities. " Thid Pg 451.3Research Questions As far as this research work is concerned, the following questions would be addressed: 1. How do conventional banks charge interest in loans and other financial products? 2. How do conventional banks determine chargeable rate of interest in an interest-bearing loan and other products? 3, What are the possible implications of these loans and other financial products on the customers in particular and the economy in general? 4, What are those alternative financial products which Islam provides into which these banks can invest for greater efficiency? 5. How would these banks sell out these products in order to ensure better service delivery to customers?1.3Research Questions As far as this research work is concerned, the following questions would be addressed: 1. How do conventional banks charge interest in loans and other financial products? v How do conventional banks determine chargeable rate of interest in an interest-bearing loan and other products? 3. What are the possible implications of these loans and other financial products on the customers in particular and the economy in general? 4, What are those alternative financial products which Islam provides into which these banks can invest for greater efficiency? 5. How would these banks sell out these products in order to ensure better service delivery to customers? 101.4Aims and Objectives The primary objects of this research are: 1) To study the definition of riba (interest), its elements, classification, historical background and chronology in its prohibition, wisdom behind its prohibition, punishment and juristic arguments canvassed on such a prohibition. 2) To analyze the nature of interest-bearing transactions of conventional banks in the light of the Qur’an and Sunnah. 3) To examine the extent of the prohibition of these transactions in modern banking business. 4) To analyze the implications of interest-based banking system on the customers on one hand and the economy on the other. 5) To provide alternative banking business models in line with shariah into which these banks should invest. 1.5Justification It is of great significance that this research be carried out considering the current trend that dominates the Muslim world where the Muslim 11community as a whole has developed a sense of collective conscience to take control of their affairs, as dictated by the Qur'an and exemplified by the Prophet in his sunnah. It is therefore only natural that a research of this type be carried out that will look into the conventions of these banks as they relate to interest, looking at the glaring detriments such transactions pose to the customer and the system as a whole. This research work is highly significant and beneficial to the bankers, their customers, theorists, academicians, law makers, legal practitioners, scholars and the general public at large. The work will serve as a blueprint for practitioners who may be called upon to address the problems of the banking processes, It is also important to students and researchers who are keen in extending the frontiers of knowledge. 1.6Scope and Limitation Riba as a concept is a recurring decimal among modern intellectuals and in study circles. Whenever a discussion is made about Islamic economics and modern practices in banks, it is unavoidably necessary that riba stems out into the discussion. Thus, riba has established a 2trademark making itself enormous to be addressed in a research of this nature and level. The focus of this research therefore, will be limited to the examination of riba as it relates to the operations of conventional banks from the view point of shariah in order to provide an alternative point of reference that will stimulate greater efficiency in the workings of the banks. 1.7Methodology In the collection. of information for this work, armchair/doctrinal method, together’ with comparative approach will be employed to access the relevant available literature on the subject. Using the armchair doctrinal‘ approach, emphasis will be made in exploring the primary sources of the law with a view to answering the main research questions. These include the Holy Qur’an and the sunnah of the prophets Muhammad (peace be upon him). Materials also abound which include but are not limited to: textbooks, journal articles, internet materials which cover Islamic banking, interest among others. 13A comparative approach of the subject will be rendered in order to see through the models of banking business carried out by conventional banks in the light of the Qur’an, Sunnah and opinions of classical and contemporary scholars. 1.8Literature Review In the course of preparing this research proposal the researcher came across certain materials that are either directly or indirectly relevant to the topic at hand. These materials cut across textbooks, journal articles, internet sources that relate directly or indirectly to the topic at hand. ‘The most important ones are therefore briefly reviewed: ‘Comparative Banking Systems’ by Umar Tela'® is a textbook which discusses the various banking systems that exist in countries around the world. It examines the challenges, controversies and dynamic changes in the banking sector brought about by the recent global financial meltdown and their impact. It suggests ways on how to Tela, U, (2014), Comparative Banking Systems, Green world Publishing Company Limited, Keff. 14respond to the economic crises that emerged in many countries as a result. The book renders an economic model of Islamic banking through theory and practice. In chapter eleven, the author sheds lights on the models of Islamic financial practices which operate on the basis of shariah principles while at the same time making comparison with conventional banking procedures in terms of the financial products they offer to customers. ‘1 Ethical Charitable Trust’s Guide to the Problem with Interest Based Banking’¥is an online article which analyses the manner in which interest based money transactions occur in today’s society, and then explores the consequences this has for individuals, society and nation states. The articles reveals the glaring effects of interest, which are not always obvious to the lay observer, with the hope that the reader can better appreciate the truly toxic nature of interest based finance. Eirst Ethical Tax Planning through Trust, 2005 First Ethical’s Guide to to the Problems with Interest Based Banking. 15