Interest, Ribit and Riba: Must These Disparate Legal Concepts Be Integrated or Is a More Nuanced Approach Appropriate for the Global Financial Community?
THE DISCONNECT BETWEEN RIBA IN THEORY UNDER THE SHA’ARIAH AND IN PRACTICE
As Dr. Mahmoud A. El-Gamal[1] pointed out in his most insightful article “Incoherence of Contract-Based Islamic Financial Jurisprudence in the Age of Financial Engineering”[2] (May 2007), there is a disconnect between the goals of Islam and the methodology chosen to avoid the strictures against Riba.
I would suggest, as noted above, there is also a disconnect between the artificial contract forms and structures used and how they might be interpreted under US law as compared to what they were intended to accomplish.
Furthermore, Dr. El Gamal notes that even when the capital markets have dealt with Sha’ariah compliant financial products (embodying equity like legal structures, so different from the loan products they are intended to mimic), they cost more than the equivalent loan product. It is submitted that if these religious oriented financial products were actually fully tested in the US courts and the courts properly interpreted the text of these legal documents, it is likely that there would even be a greater pricing disparity. Indeed, for good reason; because the legal structures are based on re-characterizing a loan as equity, with all of the attendant risks, including, intervening creditors, claims of lack of priority and difficulty of enforcement associated with such products. These deficiencies usually result in pricing disparities. Moreover, it is unclear whether there even is a summary enforcement remedy of foreclosure, which is also fundamental to the pricing of a loan product. Frankly, it is likely that the very nature of the documents is open to question. After all, it is not supposed to be a loan; or is it?
The response of the English courts is cogent. They found that it’s not their business. They chose instead to deal with the note itself and not the overlay of Sha’ariah compliant legal structures and the documents; and, as noted herein, well they should. This is because the enforcement of these structures is fraught with all manner of legal difficulty for all the reasons noted herein and likely others as well.
This kind of analysis echoes the views of Rabbi Epstein in his work the Tosefot Bracha[3] noted above. He noted the success of the banking function in promoting commerce and prosperity and yet it appeared to be prohibited Biblically. There was a disconnect. How could something so good, be so wrong? His answer was cogent. He found that the new world of commerce and finance was to be embraced and that this was indeed what the Talmud was suggesting, thousands of years before. Whether it is the original Iska (part loan and part investment trust) structure or its further development in the Heter Iska, the Halacha is not fixed; it is vibrant. It developed mechanisms to meet the needs of the real world and market place. Similarly the Sha’ariah and the mechanisms described above that are Sha’ariah compliant.
Nevertheless, to be fair, it requires some further practical changes, because nefarious debtors have sought to misuse the US courts to defeat their obligations. However, if properly employed in the religious setting, only, as intended, then it serves a vital function.
In the case of a Heter Iska, ordinary loan documents can be signed and, as noted below, a separate instrument (whether on the wall and unsigned or signed only by witnesses and not the parties), resolves any religious concerns about Ribit. This while not upsetting the requirements of the capital markets and US law. Hence, religious matters are dealt with in a way amenable to religious authorities and the wonderful benefits offered by the capital markets are embraced. As noted below, this kind of approach, in practice, may provide a useful solution as to how to deal with similar Sha’ariah law concerns.
Dr. El-Gamal also notes that the higher cost of the Sh’ariah compliant version of a financing, as compared to an ordinary loan, is also of concern.[4] Ideally, this should be a focus of Islamic jurists and mitigate against a wholesale rejection of the benefits of the capital markets approach under US law. Why not find a way to accept these lower cost formats on some expedient basis? Thus, Dr. El-Gamal points out the focus on “contract forms” as a means of purporting to provide financial products and services in accordance with Islamic law or Sha’ariah may in fact be misguided. In essence, instead of extending a mortgage loan on most favorable terms and rates, the Sha’ariah banks are purporting to buy the property first and then re-sell it to the customer in a credit priced transaction where the borrower still pays on the basis of a benchmarked implicit rate of return on capital comparable to (but higher than) prevailing mortgage rates. He points out that this, therefore, should be viewed as fundamentally adverse to the interests of the Sha’ariah in protecting borrowers. Why engage in this kind of exercise if the result is to hurt and not benefit borrowers? As noted above, the structures become very complicated and with each level of complication there are added concerns about enforceability and additional costs and pricing. Moreover, ultimately, the whole structure appears to be a ruse. There are other structures not discussed in this article that add even more additional layers of structure but the common theme is that ultimately it is all just a mechanism. At its heart, it is just an analogue; a means by which a loan with interest is derived. The form takes precedence over the substance. Is this what religion has come to stand for? Do it one way, as a matter of form, and it’s OK and, yet do the very same thing in substance, using another form and it’s not.
The incoherence that Dr. El-Gamal speaks of has many different layers of application. Frankly, as noted at the beginning of this article, the objects of each system may be the same, to facilitate the movement of capital from those with a surplus to those in need. The methodology chosen may not always perform as intended, especially when the structure is subjected to the laws of another system. Hence, there is further incoherence, as it were.
The solution may lie in the concepts expressed below. Instead of forcing one religion’s internal solutions on another conflicting legal system, it may be more effective to minimize the intrusion. Why not adopt the best each system has to offer and do so in a manner that limits interference or entanglement. Set forth below is a possible solution.
BLOWBACK BECAUSE OF REAL LIFE CONCERNS ABOUT SEPARATION BETWEEN CHURCH AND STATE IN THE US
There are reportedly initiatives underway in at least 7 States and reportedly as many as 22,[5] to ban the use of Sha’ariah in their State courts.
Bill Mears of CNN in discussing the matter,[6] reports that this is in reaction to a most disturbing case in New Jersey. It would appear that a lower court judge refused to grant a restraining order against a Muslim husband who was accused by his wife of forcing her to have sex with him. The husband defended himself against the charge of rape by asserting he was just exercising his right as a husband under Islamic law to have marital relations when he so desired. Thus, he was acting in accordance with his religious beliefs, albeit wholly inconsistent with US law that viewed his actions as nothing more than rape. Fortunately, the New Jersey Appeals Court[7] intervened and overturned the lower court’s decision to deny the wife the protection of a restraining order. The New Jersey Appeals Court found that the case “presents a conflict between the criminal law and religious precepts.”[8] The Appeals Court went on to say “In resolving this conflict, the judge determined to exempt (the husband) from the operation of the State’s statutes as the result of his religious beliefs. In doing so, the judge was mistaken.”[9]
Earlier this year, a Florida Senate panel approved an anti-Sha’ariah bill. Scott Keys[10] reported that the panel deliberated for 3 minutes. The bill had already been passed by the Senate Judiciary Committee. A concurrent bill was also to be voted on in the Florida House. The proposed legislation would ban the use of foreign laws like the Sha’ariah in Florida courts.
A similar ban was on the ballot in Oklahoma to amend the State Constitution. The initiative was preliminarily enjoined by the Federal Court of Appeals in the 10th Circuit.[11] Under the Oklahoma version, the State Constitution was to have been amended to mandate its State courts to apply only US law and not International law like the Sha’ariah.[12] Legislators in Louisiana, South Carolina, Utah, Tennessee, Texas and many other States are undertaking similar legislative initiatives.
There are in fact conflicts between Western law and traditions and other systems of law like the Sha’ariah. They cannot be readily integrated. The differences are striking and irreconcilable. My own view is there is no reason to meld these conflicting systems of law and ethics. Rather, they can and should continue to exist side by side, as discussed in this article.
[1] A noted Islamic scholar who is the Chair of the Islamic Economics, Finance and Management and Professor of Economics at Rice University.
[2] Supra footnote 176. See also supra footnote 179.
[4] See also Handbook of Islamic Banking, page 94, which notes that Islamic banks in England are more expensive more than conventional banks for the same types of credits. The Handbook is edited by M. Kabir Hassan and Mervyn K. Lewis. It is published by Edward Elgar Publishing, Inc. of the UK and Northampton, Mass. in the US. It may be referenced on the Internet as well. See also “Interest and the Paradox of contemporary Islamic Law and Finance” by Mahmoud A. El-Gamal of Rice University; Losing Interest: Financial Alchemy in Islamic, Talmudic and Western Law by Michael H. Lubetsky; Islamic and Jewish Perspectives on Interest by Joel S. Newman (89 Tax Notes 1311-12/4/2000); Contemporary Practices of Islamic Financing Techniques by Dr. Ansaf Ahmad (1993); and Issues in Islamic Banking by Mahammad Ne Jatillah Siddiquim; The Islamic Foundation, Leicester, London UK (1983/140314 at page 152).
[5] See Report by Scott Keys in ThinkProgress.org on February 29, 2012; Report by Donna Leinwand of USA Today on 12/9/2010; and Report by Bill Mears of CNN on 11/29/2010.
[7] S.D. v. M.J.R., 415 N.J. Super 417, 2 A.3d 412 (2010).
[11] Awad v. Ziriax (Federal Court of Appeals-10th Circuit Index # 10-6273-Jan. 10, 2012).
[12] See Op Ed by Michael A. Helfand “A Law We Don’t Need” – LA Times (November 10, 2010).
Leonard Grunstein 