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Article
Interest, Ribit and Riba: Must These Disparate Legal Concepts Be Integrated or Is a More Nuanced Approach Appropriate for the Global Financial Community?
Banking Law Journal (2014)
  • Leonard Grunstein
Abstract
The Article provides a timely analysis of the recent defaults, bankruptcies and attempts at restructuring of Sha’ariah compliant financial products, including. the spectacular bankruptcy by a Sha’ariah compliant institutional lender, which threatens to undermine the very basis for these products. It discusses the structural issues exposed by these events as well as the inherent incompatibility between existing Sha’ariah products and the requirements of the capital markets. The success of the capital markets in the US in delivering low cost financing of homes and income producing properties is incomparable. Among the requirements for accessing the capital markets is the need for a pristine interest payment stream that is fully secured, with a priority lien on the collateral, and which is readily enforceable. Predictability is the key. Financial products, developed under other systems of law and practice that don’t yield the expected results achievable using the model satisfying the requirements of the capital markets are problematical. They may be denied ready access to the capital markets or be priced at a premium to traditional financial products satisfying the requirements of the capital markets. The Article traces the origin and development of the Sha’ariah prohibition against Riba, and explores relevant sources, including a number of Fatwas. It also discusses the earlier and parallel development of the Halacha prohibiting Ribit . This includes its successful adaptation over time to deal with changing economic conditions, such as permitting borrowers a means of ready access to the capital markets and the benefits of lower cost financing. There is also a discussion of the unique role banks or other entities play under the Halacha and the Sha’ariah when compared to an individual. It would appear that banks are not necessarily subject to the prohibition against Ribit or Riba, respectively. A survey of relevant cases under NY law (as well as certain cases in the UK and elsewhere) is also presented. Certain constitutional aspects of applying religious oriented laws are also explored. The Article suggests that a more nuanced approach is required that both recognizes and respects the traditions of each system of law and practice and yet permits ready access to the US capital markets. The article concludes with a proposed solution that is based on precedent within the Sha’ariah and Halacha. The solution is consistent with the author’s own experience in practice, in structuring such financial products, in a manner that is capital markets’ compliant.
Keywords
  • Interest,
  • Riba,
  • Ribit,
  • Sha’ariah Compliant,
  • Capital Markets,
  • Heter Iska,
  • Sukuk,
  • Ijara,
  • Murabaha,
  • Fatwa.
Publication Date
Spring 2014
Citation Information
Leonard Grunstein. "Interest, Ribit and Riba: Must These Disparate Legal Concepts Be Integrated or Is a More Nuanced Approach Appropriate for the Global Financial Community?" Banking Law Journal (2014)
Available at: http://works.bepress.com/leonard_grunstein/5/