Interest Free Society & System of Taxation

Lecture 19 - 20Shahid Iqbal

“Those who consume interest cannot stand [on the Day of Resurrection]. That is because they say “Trade is [ just] like interest”.

But Allah has forbidden interest. So whoever has received admonition from his Lord and desists may have what is just, and his affairs rests with Allah. But whoever, returns [to dealing in interest or usury] – Those are Champions of the Fire they will be abide eventually therein”. [ Al-Quran: 2-275 ]

Allah has guided us as Muslims to stay away from taking interest. Those who are living under the misperception that interest is similar to trade are totally mistaken.

Consequently, Allah has admonished us in this respect. If those of us do not believe in these thoughts, they are destined to be the Champions of Fire and will be delivered to the Hell for ever to eventually live there.

It is therefore, required on our part that we as stakeholders must undertake all steps to eliminate interest from our economic and social life at the earliest.

Under the 1973 Constitution of Pakistan, it is obligatory on the part of the Government of Pakistan (Article 38 (f)) to eliminate Riba as soon as possible. The Government must rise to this occasion and accept this as a challenge and meet their Constitutional obligation.

Another Quranic Verse is as under:

Allah destroys interest and gives increase for Charity. And Allah does not like every sinning disbeliever”. [ Al-Quran: 2-276 ]

Based on above, Allah has encouraged giving charity and destroying interest. In another Quranic Verse, Allah has said:

• “O you who believe, fear Allah and give up what remains [due to you] of interest if you should be believers”. [ Al-Quran: 2-278 ]

Muslim as believers, based on above Quranic Verse, must give up interest and follow the orders of Allah.

Another Quranic Verse in respect of above thought shared by Allah in Al-Quran is quoted below:

• “And if you do not, then be informed of a war [against you] from Allah and His Messenger but if you repent, you may have your principle – “Thus” to no wrong nor are you wronged”. [ Al-Quran: 2-279 ]

Allah in the following Quranic Verse has also ordered that we should not consume usury in any shape. We must always fear Allah so that we may succeed in life. In this respect, a Quranic Verse is quoted below:

• “O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful”. [ Al-Quran: 3-130 ]

Usury has been understood to be high or super high rate of interest charged by financial and other institutions.

Another Quranic Verse regarding taking usury is quoted below:

“And [ for ] their taking of usury while forbidden from it and their consuming of the peoples wealth unjustly and we have prepared for the disbelievers among them a painful punishment”.[ Al-Quran: 4: 161 ]

The foregoing verse from Al-Quran contains a strict warning of painful punishment for those who take usury which Allah has forbidden. Their act in taking usury constitutes consuming of the peoples wealth in an unjust manner and for them there will be a painful punishment. In another Quranic Verse, Allah has said:

• “And whatever you give for interest [ i.e. advantage ] to increase within the wealth of people will not increase with Allah. But what you give in Zakat, desiring the countenance of Allah – Those are the multipliers”. [ Al-Quran: 30-39 ]

Based on above, Allah has again guided us to give up interest and has encouraged giving Zakat as He will, through his infinite wisdom and blessings, introduce multipliers in respect of giving Zakat.

State Bank of Pakistan Role

Islamic Banking Department was established in the Central Bank of the country namely; State Bank of Pakistan (SBP). Clear-cut statements in respect of Vision and Mission were announced. These are reproduced below:

Mission Statement

“To promote monetary and financial stability and foster a sound and dynamic financial system, so as to achieve sustainable and equitable economic growth and prosperity in Pakistan. To promote and develop Islamic Banking industry in line with best international practices, ensuring Shariahcompliance and transparency”.

Expectation ???

Islamic banking and the finance industry is growing at an annual rate of 20%. Many international as well as local institutions have stepped into this multi-billion dollar booming industry by establishing its Islamic wings and units.

International giant banks such as HSBC (HSBC Amanah), Citi Bank (CitiIslamic) and Standard Chartered have already established their Islamic units and functioning in the Middle East region.

In Sri Lanka, despite the Muslim population being just 8% of the total population, a considerable growth is reported in the past few years with the establishment of Amana, Ceylinco Profit Sharing, First Global and a new comer ABC Barakah.

Recently it is reported that the largest state owned commercial bank, Bank of Ceylon intends to commence its Islamic banking unit in early 2008. All these new entries imply that this alternative banking system has drawn the attention of Muslims as well as non-Muslims due to its unique developmental

characteristics.

The underlying principle of Islamic banks is the principle of justice which is an essential requirement for all kinds of Islamic financing.

In profit sharing of a financed project, the financier and the beneficiary share the actual or net profit/loss rather than throwing the risk burden only to the entrepreneur.

The principle of fairness and justice requires that the actual output of such a project should be fairly distributed among the two parties. If a financier is expecting a claim on profits of a project, he should also carry a proportional share of the loss of that project.

In contrast with conventional finance methods, Islamic financing is not centered only on credit worthiness and ability to repay the loans and interest; instead the worthiness and profitability of a project are the most important criteria of Islamic financing while the ability to repay the loan is sub-segmented under profitability.

One of the unique and salient characteristics of Islamic banks is that the integration of ethical and moral values with its banking operation.

The ethical and moral consideration of Islamic banks cannot be detached and their behavior should be consistent with the moral and ethical standards laid down by the Islamic Shari’ah.

Unlike the conventional banks, the financing of Islamic banks are restricted to useful goods and services and refrain from financing alcoholic beverages and tobacco or morally unacceptable services such as casinos and pornography, irrespective of whether or not such goods and services are legal or not in a given country.

In contrast with conventional banks, Islamic banks do not consider only the credit worthiness and interest rate as standards; instead they must apply Islamic moral/ethical criteria in their provision of financing.

This adds another merit for Islamic banks since there is a benefiticial impact on the productivity in the economy as it reduces the social and economic cost of such harmful products and activities.

Another important characteristic which forms the basis for the development of Islamic banks is the relationship with depositors. They deal with their customers on investment grounds rather than a pre-determined fixed interest rate.

They invest the money of their depositors on high profitable projects after going through a strategic analysis in order to give a substantial return to their

depositors.

Thus in Islamic banking industry, each bank will attempt to out-perform other banks if it wants to attract funds from investors. And the ultimate result is that a high return on investments for the investors, which is unlikely in a conventional bank where it deals with their depositors on a pre-determined fixed interest rate.

Furthermore Islamic banks eliminate the barrier between those who save and those who invest, and bring them closer to the real market.

The nature of the financial intermediation of Islamic banks significantly defers from conventional banks and it is in harmony with real market and developmental changes in it.

The Islamic Concept of Taxation

Zakat is the only tax an Islamic government can impose upon its Muslim citizens. It is not merely a charity fund but can be spent on the collective needs of the people as well.

The zakat money can be used to pay the salaries of all government officials including that of the head of state, to build all works of public interest, to cater for defence requirements and to establish an Islamic system of Insurance.

In short, the system of zakat envisaged by the Qur’ān and Sunnah totally meets the requirements of running a welfare state.

Unfortunately, the true concept of zakat has over, the years, altogether vanished from our religio-political scenario.

Why ???

Now what is our Ethical Responsibility - - - - -

This brings us to the Islamic concept of zakat. We shall discuss the principles of this institution set forth by the Qur’ān and Sunnah in three sections:

(1) The Nature of Zakat.

(2) The Heads of Zakat.

(3) The Rates of Zakat.

(1) The Nature of Zakat

According to the Qur’ān, zakat has a dual nature: (a) Intrinsic (b) Extrinsic

(a) The Intrinsic Nature: Viewed thus, zakat is an act of worship. This is evident from a number of Qur’ānic verses in which it is mentioned adjacent to salat (prayer), the most important form ofworship. The word ‘zakat’ means both ‘to purify’ and ‘to grow’: paying zakat purifys one’s wealth and soul, and it actually increases ones wealth in his afterlife. The Qur’ān stresses both these aspects of zakat:“[O Prophet!] Take zakat out of their wealth---thou would cleanse them and purify them thereby.” (9:103)

(b) The Extrinsic Nature

It is the only tax an Islamic State can impose on its Muslim subjects. While declaring the requisites of citizenship of an Islamic State, the Qur’ān says:

“And if they repent [from all un-Islamic beliefs], establish salat and pay zakat, leave them alone.” (9:5)

The above verse clearly points out that salat and zakat are part of the public law of an Islamic State, and the only two things which an Islamic government can positively demand from its Muslim citizens. As far as zakat is concerned, after a Muslim has paid it to the government, not a single penny can be further exacted from him.

This is further illustrated by the following two traditions:

“There is no [legal] share [for the society] in the wealth [of people] except zakat.” (Ibni Maajah: Kitab-uz-Zakat) and

“After you have paid the zakat of your wealth you have paid [all] that was [legally] required of you.” (Ibni Maajah: Kitab-uz-Zakat)

In this regard, the severe warning sounded by the Prophet (sws) to those who impose taxes other than those ordained by the Almightymust also be kept in mind:

“No tax-imposer shall enter paradise.” (Abu-Daud: Kitab-ul-Khiraj)

(2) Heads of Zakat

The following Qur’ānic verse spells out the heads under which the zakat fund can be expended:

“Zakat is only for the poor and the needy, and for the emancipation of the slaves and for those who have been inflict with losses and for the way of Allah and for the wayfarers.” (9:60)

http://www.flickr.com/photos/the_little_one/503021126/in/photostream/

We take up these heads in order:

1) The Poor and Needy (Fuqaraa and Masaaqeen): The poor and the needy are the foremost recipients of zakat because they are the primary responsibility of the state. It must cater for their basic needs like food, clothing, shelter, health and education. In this regard, the Prophet (sws) is said to have said:“It [ie zakat] should be taken from their rich and returned to their poor.” (Bukhari, Kitab-uz-Zakat)

2) The ‘Aamils over Zakat (‘aamileen-a-’alaihaa): Under this head, the salaries of all employees of the government including the head of the state can be paid.

3) Muallafatul Quloob: Under this head come all forms of political expenditure in the interest of Islam. There may be many instances, when the affection of certain influential people must be obtained, particularly in border areas where their role can be decisive in the safety of a country.

During the time of the Prophet (sws) many tribes were given money under this head to deter them from harming the newly founded Islamic State.

4) Slaves (riqaab): The institution of slavery was totally eliminated by Islam fourteen centuries ago.

From this particular head money was given to free slaves. Today, by analogy, this head can be extended to include other recipients. For example, prisoners of war and other prisoners who are unable to pay the fine imposed by the courts can be freed by giving money through this head.

5) Those inflicted with losses (Ghaarimeen): Under this head, an Islamic system of Insurance can be established and all those whoare inflicted with economic losses can be compensated. People who have acquired a loan and are unable to pay it back may also be helped from this money so that they may start a fresh and the society can benefit from their abilities.

6) In the Way of Allah (Fee Sabeelillaah): Under this head defense expenditures of a state can be met and institutions for religious propagation as well as all works of public interest like roads, bridges, mosques, hospitals, educational institutions and libraries can be built.

7) The Wayfarer (Ibnussabeel): This implies the welfare of the wayfarer. Circumstances often make a traveller a needy person, in which case, his needs can be fulfilled from this head.

(3) Rates of ZakatBefore we mention the rates of zakat, a mention seems necessary of the items which are exempt from zakat. Nothing except the following three are exempt:

(i) Means of production: eg. tools, machinery etc.(ii) Personal items of daily use: eg. personal belongings like, house, car etc.(iii) A fixed quantity called nisaab.

However, an Islamic government can give relaxation on any item in the interest of the public or because of any constraint in the collection of zakat on a particular item. As far as the various rates of zakat are concerned, three distinct categories can be classified:

1. Wealth: After deducting the nisaab and taking into consideration other exemptions mentioned above, the wealth of a person, shall be taxed annually at the rate of 2%. Tax on trade capital shall also be levied at the same rate by considering this capital to be the sum of cash in hand and cash in trade.

2. Produce: Zakat on produce is deducted at the time of produce and depending upon the various items has three rates: 5%; 10%; 20%

i) 5%: On items which are produced by the interaction of both labour and capital: eg. produce from irrigated lands and industrial produce from factories.

ii) 10%: On items which are produced such that the major factor in producing them is either labour or capital, but not both. Examples of the former include an artist’s creation like paintings and the works of scholars and intellectuals, while examples of the latter include rented houses, and produce from rainy lands.

iii) 20%: On items which are produced neither as a result of labour nor capital but are actually a gift of God, eg treasure etc.

3. Animals: Only those animals which are breed and reared for the purpose of trade and business are subject to zakat.

This is the concept of zakat envisaged by the Qur’ān and Sunnah. From the above details it is clear that zakat is the only tax which an Islamic government can impose on its Muslim subjects and that it is not merely a fund for the destitute.

Moreover, since there is no basis for necessarily giving it in the possession of an individual, it can be spent on the collective needs of the people as well.

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