Riba vs Ribbit — A study of parallels and dissimilarities in Islamic and Judaic finance
The terms — loan, credit, interest…
The basic approach to these concepts in Judaism and Islam is similar. The difference is mostly in the number and type of persons in respect of which the relevant restrictions apply.
The impossibility of lending with an interest among the Jews themselves led to the development of financial and legal thought, taking shape in the “Heter Iska” (literally, a “business permit”, also a Joint Business Agreement). The use of this financial arrangement allows one to receive and pay interest, considering it as a contribution to a common cause, or as a distribution of profits, depending on whether one takes a loan from a bank, or on the contrary, makes a deposit.
However, it is worth noting that the direct meaning of the Heter Iska is almost completely comparable with the Musharakah agreement and its principles. We are dealing with a partnership in both cases.
There is a BUT. Heter Iska (Partnership) can be used Islamic finance the borrower is running a business. And if we are dealing with a private individual, who receives a salary and who needs a smartphone, a car, etc. — it is then necessary to turn to a Rabbi for clarification whether it is possible to use the Heter Iska in such situations. Most likely, in this case, an analysis will be made of the possibility of establishing a dependence on the receipt / increase in the salary of an individual person from using the thing he or she needs, which he or she wants to buy on loan.
It should be noted, that the number of specially allocated and standardized types of transactions in Islam is significantly greater. Perhaps, this is due to the fact that the strict rules in doing business in Judaism are applied in relationships only between Jews. And with financial interaction with representatives of other religions, it is possible to conclude any transaction without restrictions. Most likely, this is why the versions of Ribbit (prohibition of usury) are analyzed and described in sufficient detail by the Jewish sages, in addition to the direct prohibitions indicated in the Torah.
There are some interesting nuances. For example, it is forbidden to purchase in installments, if it is known that the price for the goods in installments will be higher than when buying outright. Moreover, such Ribbit is forbidden by the sages. But the Torah itself does not contain such prohibition.
In Islam, the time has a value. For example, let’s take a Salam transaction: the price of grain under a Salam agreement, for example, in the spring, when funds are needed for planting, will be lower than the price of the grown grain in the summer, when it is already ripe and harvested. Or the urgency of a provision of any service is also the price of time. Thus, it turns out that within the limits of the restrictions in financial relations between the Jews, it is not possible to carry out a Murabahah deal.
There is another interesting type of a transaction accepted in Judaism which is associated with the celebration of Pesach (Passover) — the sale of chametz. Chametz is translated as “leavened” and generally relates to any food product made from wheat, barley, rye, oats or spelt that has come into contact with water and been allowed to ferment and “rise.”
During the Passover, a Jew should not have chametz in the house. If this is a small amount, then one can simply throw it away. If the stocks are large, then chametz must be sold to a non-Jew, so that during the holidays, it is not legally owned by that Jew.
Well, in a simplified format the transaction looks like this:
1) A Jew sells chametz under an agreement to a non-Jew in installments (an advance payment is made immediately and the balance — after the end of the holidays);
2) A non-Jew makes an advance payment for chametz; this deal is genuine, because if a non-Jew wants to obtain ownership of chametz, he has the right to pay out the remaining amount on time and take the property (chametz).
3) At the end of the holidays, the Jew offers the non-Jew to redeem the chametz for a small premium;
4) The Jew pays the amount equal to the advance payment plus the bonus, and the deal is offset.
So, if one carefully looks at these operations, then an analogy with Tawarruq presents itself. Let’s imagine that the payment was made in full. After that, there was a buyout at the full price with a premium. Well, a classic short-term Tawarruq!
So, it turns out the very principle of combining transactions to build the necessary financial product, adapted to the time and the current situation, corresponding to the religious requirements is COMMON to both, Islam and Judaism.
Let’s try to consider the use of structured and long used Islamic financial products within the limits of Judaism:
The task’s background:
It is forbidden for a Jew to lend money to another Jew at interest. A Jewish bank is also prohibited from lending to a Jew at interest. One has to use Heter Iska. It is almost impossible to use Heter Iska when financing individuals — they normally do not operate businesses. It is also impossible to finance a purchase of something in installments due to the prohibition by the Jewish religious scholars.
The task at hand:
To structure a transaction in such a way that it is possible to finance working capital of a legal entity and to finance individuals while maintaining the profitability of the transaction.
Let’s look at a Tawarruq transaction. The Tawarruq in accordance with Shariah standards is a transaction entered into for the purpose of obtaining cash, consisting of the purchase of a product with a deferred payment and the subsequent sale of this product to a third party other than the original seller for immediate payment. A transaction is deemed fictitious if it involves buying the product from a certain person for a deferred payment and selling it to the same person for an immediate, lower payment.
For example, the market price of an asset is US$1,000.
1. The client buys goods from the bank in installments for 5 years for US$1,500.
2. The client sells the asset at the market price for US$1,000.
Thus, the client received US$1000 financing for 5 years. For this he will pay US$500. The bank’s earnings are within the trade margin.
Let’s consider a Judaic transaction:
1. It is forbidden to pay the price higher than the market (even in paid in installments). So one has to pay the market price.
2. There is no limit on the sale price, though. So the sale can be done at the price below the market.
Well, let’s look at this transaction when structured using Islamic finance principles. The market price of an asset is still US$1,500:
1. The bank provides an interest-free loan for 5 years.
2. The client buys an asset at the market price with these funds (with the bank acting as a broker).
3. The client sells the asset for US$1,000 to an investment company.
Thus, the client received US$1,000 financing for 5 years. For this he will pay US$500. The joint earnings of the bank and investment company (related, of course) are in the trading margin.
In the absence of the loan, a bank sells the asset in installments for 5 years for US$1,500, and the client sells an asset to an investment company for US$1,000. But in both cases, if the bank and the investment company are connected, such transaction becomes fictitious under the Shariah rules.
Thus, using the principles of financial products from Islamic economics, it is possible to structure transactions within the limits of Judaism.