10. Usury

The Hebrew Bible severely restricts the collection of interest on loans, a disparagement that has passed into both Christianity and Islam. A common view nowadays defines usury as simply the collection of "excessive" interest (with varying definitions on what is excessive). As the following discussion will show, the original bans on usury were more categorical.

INTRODUCTION

In principle all three Abrahamic traditions condemn usury. To ensure economic functioning, however, it has proved expedient to admit various exceptions, evasions, and legal fictions--both de jure and de facto--under changing circumstances.

The term comes from the Latin usura, which originally meant simply the use or enjoyment of a thing; by extension it signified a sum paid for the use of money, that is to say, interest, The term usury has passed into most Western European languages. Beginning in the sixteenth century, Renaissance French shows an extended sense of usure to reflect deterioration through extended use or the passage of time, as in old buildings or the passage of time. The pejorative implications are unmistakable.

In Hebrew the appropriate terms are neshekh (a “bite,” alluding to the pain experienced by the debtor) and marbit, tarbit, and ribbit (denoting the creditor’s gain.) More specifically, neshekh referred to interest that was charged by deducting it from the loaned money itself, before the sum was handed over to the debtor, while marbit/tarbit corresponded to interest charged by adding it to the amount due to be repaid. In Arabic the appropriate term is riba, as employed in the Qur’an.

THE HEBREW BIBLE AND THE RABBIS

Four Biblical texts are pivotal:

1) “If you lend money to my people, to the poor among you, you shall not deal with them as a creditor; you shall not extract interest from them.” (NRSV; Exodus 22:25)

2) “Do not take interest in advance or otherwise make a profit from them [i.e. your kin]l; but fear your God; let them live with you. You shall not lend them your money at interest taken in advance, or provide them with food at a profit.” (Leviticus 25:36-37)

3) “You shall not charge interest on loans to another Israelite, interest on money, interest on provisions, interest on anything that is lent. On loans to a foreigner you may charge interest, but on loans to another Israelite you may not charge interest,” (Deuteronomy 23:19-20)

4) A passage in the eighteenth chapter of Ezekiel classes lending at interest with a host of grave sins, including shedding of blood, adultery, robbery, oppression of the poor and needy, and “committing abomination.” With regard to the commission of all these sins, including that of the one who takes advance or accrued interest, the text pointedly asks “shall he then live?” The answer is no. “He has done all these things; he shall surely die; his blood shall be upon himself.” (Ezekiel 18:10-13; cf. 18:17).

Texts one, two, and, four link the prohibition of usury with the oppression of the poor and downtrodden. Yet was the third text, which clearly distinguishes between charging interest to a fellow Israelite (forbidden) and charging interest to a foreigner (acceptable), that was to prove the most resonant and problematic in later centuries, especially in medieval Christendom. Evidence found elsewhere in the Hebrew Bible (e.g.I Samuel 22:2; II Kings 4:1; Isaiah 50:1, Ezekiel 22:12, Nehemiah 5:7 and 12:13) suggests that in practice these prohibitions were sometimes evaded. However, the doctrine of prohibition--whether limited in application to one’s fellow Israelites, or (apparently) universal--remained influential.

What was the Middle Eastern context of giving loans at interest? By the late third millennium BCE, stable procedures for issuing credit had arisen in Mesopotamia (Babylonia and Assyria). We know this from the survival of thousands of documents acknowledging the the receipt of goods and silver, and stating the obligations for the repayment of the loans. The creditor could be an individual, several persons, the individual in concert with an institution, or the institution itself. The repayment period was generally short, sometimes only a few days. But it could be stretched out to encompass several years. Supposedly a flat rate of 20% interest prevailed, with a 33 1/3 rate for grain. But the documents show that in practice the rates were quite variable. Sometimes loans were issued interest-free. Credit-bearing loans were especially important in international trade (van de Mieroop, 1997). This role could help to explain the disdain felt for the practice in ancient Israel, because as a rule the Israelites did not engage in international trade, and often felt exploited by those who did. Moreover, in Mesopotamia lending for interest was mainly an urban phenomenon. At the time when Israelite attitudes were formed theirs was essentially a rural, tribal society. In a larger sense, the Israelite opposition to usury served as a status confessionis, a marker separating them from outsiders. Israelite dietary restrictions (kashrut)--involving prohibition of pork, shellfish, and other foods--served a similar purpose.

The anti-usury texts in the Hebrew Bible were reinforced and expanded on in the rabbinical texts, which offer pertinent examples from daily life. In the tractate Baba Metzia of the Mishnah (compiled ca. 200 CE), the comment indicates that interest is reckoned not merely in money, but in grain, foodstuffs and anything else that is considered profitable. Guilt attaches to all who are involved in the transaction: the lender, the borrower, the guarantor, and the witnesses.

The corresponding tractate of the Babylonian Talmud (Talmud Bavli), also entitled, Baba Metzia, offers further explanations. The distinction made in the Deuteronomy passage, which allows interest to be charged on loans to non-Jews is fundamental. In this regard the commentators disparage the practice whereby a Jew who is asked for a loan from a fellow Jew first loans the money to a non-Jew at interest, whereupon the gentile confederate loans it to the Jew who had originally requested it--again at interest. The fact that the rabbis condemn such a practice shows that it had been occurring. In fact this devious procedure is an early indicator of a mass of subterfuges that made their way into the business practices of all three Abrahamic religions. Today, such evasions and legal fictions constitute virtually the entire raison d’être of Islamic banking.

The exception made for loans to non-Jews accounts for the role that Jewish lenders assumed in medieval Europe, where Christians were ostensibly forbidden to engage in such transactions. As will become clear, however, over time various loopholes appeared and the Christian order of the Templars, together with the leading Italian banking houses, became major lenders at interest.

CHRISTIAN DISPARAGEMENT OF WEALTH

Generally speaking, the earliest Christian communities acquiesced in the prevailing norms of Roman law, which permitted charging at interest. However, the New Testament offers several signal instances of disapproval of wealth and the rich. A rich young man asked Jesus what he must do in order to inherit eternal life. Jesus replied that he should keep the commandments, to which the man stated he had done. Jesus responded, "If you want to be perfect, go, sell your possessions and give to the poor, and you will have treasure in heaven. Then come, follow me." When young man resisted, Jesus offered this response, “... I tell you the truth, it is hard for a rich man to enter the kingdom of heaven. Again I tell you, it is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God.” (see the parallel versions in Matthew 19:23-24; Mark 10:24-25; and Luke 18:24-25).

The First Epistle to Timothy, traditionally ascribed to the Apostle Paul, has Jesus saying "The love of money is the root of all evil." (KJV; 1 Timothy 6:10). The expression is commonly misquoted in truncated form as "Money is the root of all evil." In later medieval lists Avaritia (greed or covetousness) ranks as one of the Seven Deadly Sins. Like lust and gluttony, greed is a sin of excess. The church regards greed as an inordinate and rapacious desire for the acquisition of wealth, status, and power. Thomas Aquinas wrote that greed was "a sin against God, just as all mortal sins, in as much as man rejects eternal things for the sake of temporal things." In Dante's Purgatory, penitent sinners of this kind were bound and laid face down on the ground for having concentrated too much on earthly thoughts.

The disparagement has migrated into modern secular psychology, where greed is an inordinate desire to acquire or possess more than one needs or deserves, especially with respect to material wealth. In common parlance, an individual who relentlessly pursues such accumulation is termed a miser, cheapskate, curmudgeon, niggard, penny pincher, piker, scrooge, skinflint or tightwad; the profusion of synonyms shows how widespread the disparagement is. Prior to the appearance of Social Security, such acquisitive behavior might have seemed rational, even essential in order to avoid the scourge of poverty in old age. Nowadays it seems less so.

CHRISTIANITY AND USURY

In 325 the Council of Nicaea forbade clergy from engaging in usury (canon 17). However, a rate of one per-cent per month was allowed. Later ecumenical councils applied the regulation to the laity. The Third Lateran Council decreed that persons who accepted interest on loans could receive neither the sacraments nor Christian burial (Moehlman, 1934). In 1311 Pope Clement V made the belief in the right to usury a heresy, seeking to abolish all secular legislation that permitted it. Pope Sixtus V condemned the practice of charging interest as "detestable to God and man, damned by the sacred canons and contrary to Christian charity." (Noonan, 1957).

These summary judgments notwithstanding, usury--or various practices amounting to it--thrived in various sectors of medieval Europe.

A case in point was the Order of the Knights Templar. Though initially an Order of poor monks, the official papal sanction made the Knights Templar a charity across Europe. Further resources came in when members joined the Order, as they had to take oaths of poverty, so that they often donated large amounts of their original cash or property to the Order. Additional revenue came from business dealings. Since the monks themselves were sworn to poverty, but had the strength of a large and trusted international infrastructure behind them, nobles would occasionally resort to them as a kind of bank or power of attorney. If a noble wished to join the Crusades, this might entail an absence of years from his home. So some nobles would place all of their wealth and businesses under the control of Templars, to safeguard it for them until their return. Through these means, the Order's financial power became substantial. Before long, the majority of the Order's infrastructure was devoted not to combat, but to economic pursuits.

By 1150, in fact, the Order's original mission of guarding pilgrims had shifted into a task of guarding their valuables through an innovative way of issuing letters of credit, an early precursor of modern banking. Pilgrims would visit a Templar house in their home country, depositing their deeds and valuables. The Templars would then give them a letter which would describe their holdings, sometimes indicated in code. While traveling, the pilgrims could present the letter to other Templars along the way, so as to withdraw funds from their account. This kept the pilgrims safe since they were carrying few valuables.

Officially the idea of lending money in return for interest was forbidden by the church, but the Order sidestepped this ban with clever loopholes, such as a stipulation that the Templars retained the rights to the production of mortgaged property. Not being allowed to charge interest, they charged rent instead.

The Templars' political connections and awareness of the essentially urban and commercial nature of the Christian states of the Levant (Outremer) naturally gave the Order to a position of significant power, both in Europe and the Holy Land. They owned large tracts of land both in Europe and the Middle East, built churches and castles, bought farms and vineyards, were involved in manufacturing and import/export, had their own fleet of ships, and for a time even owned the entire island of Cyprus.

As the Muslims gradually reasserted control over Jerusalem and the Holy Land, the power base of the Templars diminished. Jealousy and greed inspired Philip the Fair of France to attack them; he was supported by Pope Clement V, a childhood friend of Philip’s. The king and the pope accused the Templars of atheism, sodomy, and blasphemy. Templars were tortured into forced confessions before being executed in large numbers. Scholars have long debated whether any charges were true, but the self-interest of the accusers is undeniable.

The last Grand Master of the Knights Templar was Jacques de Molay, a Frankish noble who had promised to reform the order when he was elected in 1292. He proved unable to counter the attacks made against the order because of their financial power. He confessed to all manner of crimes while under torture, but he later recanted which infuriated King Philip the Fair who had him burned at the stake with two other Templar leaders on an island in the river Seine in Paris on March 18, 1314.

The accusation of sodomy is striking, because of the connection that medieval popular opinion saw between sodomy and usury. This link will be discussed below.

LEGAL FICTIONS AND PRACTICAL EVASIONS

Since no economy or money-based society can prosper without any provision for credit, various ways of circumventing the ban were devised. One was the doctrine of "damnum emergens." If a lender suffered loss by the failure of the borrower to return a loan promptly at a date specified, compensation might be required. And so it happened that, if the nominal date of payment was made to follow quickly after the real date of the loan, the compensation for the anticipated delay in payment had a curious resemblance to interest. As the saying goes, "if it looks like a duck, and quacks like a duck, it is a duck." However, medieval casuistry made it easy to deny that there were any ducks. Also invoked was the doctrine of "lucrum cessans." If a man, in order to lend money, was obliged to diminish his income from productive enterprises, it was claimed that he might receive something in return, in addition to his money, an amount equal to this reduction in his income.

Pawn shops generally operated on the basis of a contract that fixed in advance the “fine” assessed for not respecting the nominal term of the '”interest-free” loan, or alternatively, they might structure a sale repurchase by the “borrower” where the interest is implicit in the repurchase price. Similar conventions exist in modern Islamic banking (see below).

Lowly pawnshop contractors could bundle their risk and investment for larger undertakings, contributing to the rise of banks in the modern sense. In fact, the
term “Lombard banker” embraces a wide variety of phenomena, from simple pawn shops to the great banks of Florence and Siena. Despite the subterfuges they practiced, townspeople tended to associate the Lombards, and north Italians in general, with usury.

A common misconception is that the Jewish minority monopolized medieval money lending, in accordance wit Deuteronomy 23:19-20 which permitted such activity with non-Jews. As we have seen, however, Christians devised many ways of getting around the prohibition, which ostensibly applied to them in its totality. Jewish money lenders did play a role, sometimes lesser, sometimes greater, but they did not dominate the activity.

Stigma attached to other groups. The use of the term Lombard for a pawn shop grew slowly from city to city, eventually attaching itself to Cahors in southwestern France, so that the reputation of that town also became implicated. In the thirteenth century the Cahorsins moved as far north as Amsterdam, where they were called Cahorsijnen, Cawarsini, or Coarsini.

The medieval association of homosexual behavior and usury is attested by the use of the old French term “bougre” to mean (among other things) “One who lends money at an excessive rate of interest.” In the Inferno (11:50) Dante links the two vices toponymically as “Soddoma e Caorsa” Cohorsa is the town in Guienne, famous for its money-lenders. This linkage probably also accounts for Sir Edward Coke’s strange claim in the seventeenth century that the Lombards had introduced sodomy into England. In his time it was accepted that the vice was particularly rife in Italy and the Lombards had been the leading bankers of late medieval London, forming the first Italian colony there.

The medieval association rests upon a Scholastic analysis of money as intrinsically sterile, a view supported by reference to Aristotle. “There are two sorts of wealth-getting, as I have said; one is a part of household management, the other is retail trade: the former necessary and honorable, while that which consists in exchange is justly censured; for it is unnatural, and a mode by which men gain from one another. The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it. For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of any modes of getting wealth this is the most unnatural.” (Politics, I, 10). In this analysis the word "unnatural" evoked the idea of sodomy in the medieval mind.

To put the matter simply, a cow and a bull produce offspring, but gold and silver do not. In the fourteenth century, Nicolas Oresme declared that “it is monstrous and unnatural that an unfruitful thing should bear, that a thing specifically sterile, such as money, should bear fruit and multiply of itself.” Martin Luther put the matter in lapidary terms: “pecunia est res sterilis” [money is a sterile thing].

During the twentieth century the connection was revived by the American poet Ezra Pound. In Canto XLV (completed in 1936) he defines usura as “sin against nature” (referencing the antihomosexual passage in Romans 1:26-27). In a fragment not included in the published text of The Cantos (dated Christmas 1935) he states “[f]air sharing is not bhuggery [sic], fair sharing is not usury,” showing his equation of the two. He goes on to write “fair sharing is not sodomy . . . taxation is not sodomy,”

ISLAM

Islam inherited the Jewish and Christian disapproval of lending at interest. In Arabic Riba means usury; Islamic jurisprudence (fiqh) generally forbids the practice. Islamic jurists distinguish two types of riba: that prohibited by the Qur’an (an increase in capital without any services provided), and that prohibited in the Sunnah (comprising commodity exchanges in unequal quantities). Historically, the consensus of Muslim jurists was that any loan which involved an increase in repayments was forbidden. As such, Islamic states prohibited it. Eventually, as European influence spread in the Middle East, the ban on usury was relaxed in the interest of promoting free trade.

Religiously, riba ranks among the Seven Heinous Sins (Al-Saba al-Mubiqat). These sins are as follows: believing in Gods other than Allah; magic; murder; riba/usury; unlawful taking of orphans’ money; fleeing the battlefield; and falsely accusing chaste, pious women.

In fact, twelve verses of the Qur’an allude to riba, the word appearing eight times in total, that is to say, three times in 2:275, and once in 2:276, 2:278, 3:130, 4:161 and 30:39

Here are two telling examples. “O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful.” (3:130); and “Those who benefit from interest shall be raised like those who have been driven to madness by the touch of the Devil; this is because they say: ‘Trade is like interest’ while God has permitted trade and forbidden interest… God deprives interest of all blessings, but blesses charity. . . . O believers, fear God, and give up the interest that remains outstanding if you are believers. If you do not do so, then be sure of being at war with God and His messenger. But, if you repent, you can have your principal." (2:275-280) The second statement distinguishes lawful trade (which Muhammad himself practiced) from riba (which is forbidden).

In his farewell sermon (as mentioned in the Hadiths and several other documents), Muhammad is reputed to have said: “God has forbidden you to take riba, therefore all riba obligation shall henceforth be waived. Your capital, however, is yours to keep. You will neither inflict nor suffer inequity. God has judged that there shall be no riba and that all the riba due to `Abbas ibn `Abd al Muttalib shall henceforth be canceled.” Reputedly, Muhammad declared indulgence in riba worse than adultery: worse in fact than “a man committing adultery with his own mother.” (Sunan Ibn Majah)

Islamic Sharia law treats riba as a tool of oppression--a way of unjustly taking others’ money by exploiting their needs and circumstances. Hence it seeks to forbid a riba-based system altogether, promoting and it charity as an alternative.

In modern economic terms, riba would be regarded as “surplus value without counterpart.”

The medieval philosopher Ibn Rushd (Averroes) argued that the rationale for the prohibition relates to the possibilities of cheating that riba affords. Other arguments advanced by writers analyzing the sacred texts include such matters as corruption, unjust acquisition of property rights, and debilitating effects on the human personality. Some observers summarize the ban by saying the Islamic principle is that for a reward, there must be some liability incurred; without this a return is prohibited.

ISLAMIC BANKING

Banking according to modern principles was introduced into Islamic and partly Islamic countries as a result of the penetration of those countries by Western merchants and imperialists. Because of these origins, the original banks felt no obligation to adhere to Islamic religious restraints on the collection of interest.

The Ottoman Bank was founded in 1856 in the Galata district of Istanbul, as a joint venture between British interests, the Banque de Paris et des Pays-Bas of France, and the Ottoman government. The bank’s opening capital consisted of 135,000 shares, 80,000 of which were bought by the English group, and 50,000 of which by the French group, whereas 5,000 shares were allocated to the Ottomans. Operating as the Imperial Ottoman Bank until 1924, it gradually assumed the functions of a state bank.

The Anglo-Egyptian Bank was established under British auspices in 1864, sponsored by a consortium of four European firms.

The history of banking in British India, with its large Muslim population, is instructive. Banking in India originated in the closing decades of the eighteenth century. The first banks were The General Bank of India which started in 1786, followed by the Bank of Hindustan, both of which are now defunct. In June of 1806 there was established the Bank of Calcutta, which almost immediately became the the Bank of Bengal. This was one of the three Presidency banks, the other two being the Bank of Bombay and the Bank of Madras. Significantly, all three were established under charters from the British East India Company. The three banks merged in 1921 to form the Imperial Bank of India, which, upon the country’s independence in 1947, became the State Bank of India.

Following British models, Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. Established in 1865, the Allahabad Bank is the oldest Joint Stock bank in India. Banking in India remained the exclusive domain of Europeans until the beginning of the twentieth century.

Given this history of European domination, how did Islamic banking arise? Today it is flourishing, and the reasons for this success deserve some exploration.

Islamic banking is a system of banking or banking activity that is held to be consistent with the principles of Islamic law (Sharia), together with its practical application through the development of Islamic economics. Sharia prohibits the payment or acceptance of interest fees for the lending and accepting of money respectively (riba or usury) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles. While these principles proved to compatible with economic flourishing in earlier times, it is only in the late twentieth century that significant Islamic banks emerged to apply these principles to private or semi-private commercial institutions within the Muslim community.

Interest-free banking seems to be of very recent origin, specifically in the 1940s, when a number of writings appeared proposing a banking system based on the concept of mudarabha (profit and loss sharing}.

In the following two decades interest-free banking attracted more attention, partly because of official policies in Pakistan and partly because of the emergence of a corps of young Muslim economists. Works specifically devoted to this subject began to appear in this period. The first such work is that of Muhammad Uzair (1955). Another set of works emerged in the late sixties and early seventies. Abdullah al-Araby (1967), Nejatullah Siddiqi (1961, 1969), al-Najjar (1971) and Baqir al-Sadr (1961, 1974) were the main contributors.

The early seventies saw the institutional involvement. Significant events were the Conference of the Finance Ministers of the Islamic Countries held in Karachi in 1970, an Egyptian study of 1972, the First International Conference on Islamic Economics in Mecca in 1976, and the International Economic Conference in London in 1977. The involvement of institutions and governments led to the application of theory to practice and resulted in the establishment of the first interest-free banks. The Islamic Development Bank, an intergovernmental bank established in 1975, emerged this process.

The first modern experiment with Islamic banking was undertaken unobtrusively in Egypt without emphasizing its Islamic character, for fear of being seen as a manifestation of Islamic fundamentalism that was anathema to the political regime. The pioneering effort, led by Ahmad Elnaggar, took the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963. In due course nine such banks appeared in the country.

In 1975 the Islamic Development Bank was established with the mission of providing funding for projects in the member countries. The first modern commercial Islamic bank, the Dubai Islamic Bank, opened its doors in 1975. In the early years, the products offered were basic and strongly founded on conventional banking services, but in recent years the industry has been starting to see strong development in new products and services.

It has been estimated that Islamic Banking is growing at a rate of 10-15% per year and with signs of consistent future growth. Islamic banks have more than 300 institutions spread over 51 countries, including the United States through companies such as the Michigan-based University, as well as an additional 250 mutual funds that adhere to Islamic principles. It has been estimated that worldwide sharia-compliant assets under management are approaching a value of a trillion US dollars. As of 2005 this share represented approximately 0.5% of world total of estimated assets.

PRINCIPLES OF ISLAMIC BANKING

Islamic banking has the same purpose as conventional banking except that it operates in accordance with the Sharia rules of known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (usury) Common terms used in Islamic banking include profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost-plus (Murabahah), and leasing (Ijarah).

An Islamic mortgage transaction, for example, would proceed as follows. Instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and then resell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the bank's profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for collateral on a strict basis. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabaha. Another approach is Eijara wa Eiqtina, which is similar to real- estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid).

An innovative approach applied by some banks for home loans, called Musharaka al-Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower form a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rents out the property to the borrower and charges rent. The bank and the borrower will share the proceeds from this rent based on the current equity share of the partnership . At the same time, the borrower in the partnership entity also buys the bank's share of the property at agreed installments until the full equity is transferred to the borrower and the partnership is ended. If default occurs, both the bank and the borrower receive a proportion of the proceeds from the sale of the property based on each party's current equity. This method allows for floating rates according to the current market rate such as the BLR (base lending rate), especially in a dual-banking system like in Malaysia.

Business transactions display several other approaches used in business. Islamic banks lend their money to companies by issuing floating rate interest loans. The floating rate of interest is pegged to the company's individual rate of return. Thus the bank's profit on the loan is equal to a certain percentage of the company's profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. This practice is called Musharaka. Further, Mudaraba is venture-capital funding of an entrepreneur who provides labor while financing is provided by the bank so that both profit and risk are shared. Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure. Following this principle results in a balanced distribution of income, preventing the lender from dominating the situation.

Since Islamic banking is restricted to Islamically acceptable procedures, it excludes transactions involving alcohol, pork, gambling, and other forbidden things. The aim is to engage in only ethical investing and moral purchasing.

In theory, Islamic banking is an example of full-reserve banking, with no leveraging so that the institutions achieve a 100 per-cent reserve ratio. Yet this is not the case in practice, and no examples of 100 per-cent reserve banking have been observed.

Another aspect is micro-lending institutions founded by Muslims, notably the Grameen Bank. Using conventional lending practices these are popular in some Muslim nations, especially Bangladesh. Some critics do not regard as true Islamic banking. However, Muhammad Yunus, the founder of Grameen Bank and a pioneer in the field of microfinance banking, holds that the lack of collateral and lack of excessive interest in micro-lending is consistent with the Islamic prohibition of riba.

MONEY TRANSFERS (HAWALA)

Hawala (or hundi) is an informal value-transfer system based on the performance history and established trust linking a huge network of money brokers, based mainly in the Middle East, North Africa, the Horn of Africa, and South Asia.

The hawala concept has its origins in classical Islamic law (Sharia); it is mentioned as early as the eighth century in texts of Islamic jurisprudence. It is said to have later influenced the development of the principle of agency in the common law and the civil law tradition (cf. aval in French law and avallo in Italian law, both terms deriving from hawala).

Roman law had not permitted the transfer of debt, but the practice became common in medieval Europe, influenced by the trade Italian merchants conducted with the Muslim world. Again, Roman law forbade one person to act as the agent of another, for no individual could conclude a binding contract on behalf of another. By contrast, Islamic law and the later common law freely permitted agency in the field of contracts and of obligations in general.

Hawala is believed to have arisen in the financing of long-distance trade around the emerging capital trade centers in the early medieval period. In South Asia, it appears to have developed into a fully-fledged money-market instrument, which was only gradually replaced by the procedures of the formal banking system of Western origin in the first half of the twentieth century. Today, hawala plays a major role in the remittances of migrant workers to their country of origin.

In the most basic version of the hawala system, a network of hawala brokers, or hawaladars, arrange for the transfer of money. A customer approaches a hawala broker in one city, producing a sum of money to be transferred to a recipient in another, usually foreign, city. The hawala broker calls another hawala broker in the recipient's city, gives disposition instructions of the funds (usually minus a small commission), and promises to settle the debt at a later date.

A special feature of the system is that no promissory instruments are exchanged between the hawala brokers; the transaction relies entirely on the honor system. As the system does not depend on the legal enforceability of claims, it can operate even in the absence of a legal and juridical environment. Informal records are kept of individual transactions, and a running tally of the amount owed by one broker to another is maintained. Settlements of debts between hawala brokers can assume a variety of forms; it need not take the form of direct cash transactions.

In addition to commissions, hawala brokers often earn their profits through bypassing official exchange rates. Generally, the funds enter the system in the source country's currency and leave the system in the recipient country's currency. As settlements often take place without any direct foreign exchange transactions, they can be made at other than official exchange rates.

Customers find hawala attractive because it provides a fast and convenient means for transfer of funds, usually with a far lower commission than that charged by banks. Its advantages are most pronounced when the receiving country manipulates exchange rates (as has been the case for many typical receiving countries in the Middle East), or when the banking system in the receiving country is fairly primitive. Moreover, in some parts of the world it is the only option for legitimate funds transfers, and has even been used by aid organizations in areas where it is the best-functioning institution. In recent years the latter practice has caused concern because it is thought to have facilitated money transfers for terrorist groups. In principle,hawals may also be used for money laundering of drug profits, though the evidence for this is scanty.

The money transfers are informal and not effectively regulated by governments, which is a major advantage to customers with tax, currency control, immigration, or other concerns. In some countries, hawalas are actually regulated by local governments and hawaladars must be licensed in order to perform their money brokering services

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