Monday, July 13, 2015

Islamic law and the prohibition against interest: an impediment for CRS ?

Indonesia, a signatory of the CRS intending to start exchanging information in September 2018, is the world´s most populous Muslim-majority nation. As such it is somewhat bound by riba, the Muslim concept that interest payments are not allowed. The CRS not only reports account balances but also interest and dividend payments. Should intrests and dividends be reported to jurisdictions that consider these type of payment  as sin ?

The concept that interest is unethical is called riba and mentioned and condemned in several different verses in the Qur’an and in collections of reports purporting to quote what the Islamic prophet Muhammad said verbatim on any matter (so –called hadith).

The Mekkan verse in Surah Ar-Rum:
And whatever Riba you give so that it may increase in the wealth of the people, it does not increase with God (Quran 30:39)

And a little clearer:
And because of their charging Riba while they were prohibited from it (Quran 4:161)

While Muslims agree that Riba is prohibited, there is disagreement over which types of behavior fall under the prohibition. Many but not all scholars have come to consider riba as any interest charged on loans. Scholars further disagree over whether it is a major sin and against sharia(Islamic law), or simply discouraged (makruh). Picture1 That this issue is not merely academic can be seen from a 2004 incident in the Pakistani parliament where an MP quoted an Egyptian Islamic scholar decreeing that bank interest was not un-Islamic. This innocuous statement caused an uproar and the response by an Islamist MP saying that since the Pakistan state Council of Islamic Ideology had decreed that interest in all its forms was haram in an Islamic society, no member of parliament had the right to negate this “settled issue”.

One of the leading Islamic banking theorists, Siddiqi, claims that “efforts of some pseudo jurists to distinguish between riba and bank interest have met with almost universal rejection and contempt” (Indonesia, Law and Society, Timothy Lindsey, Federation Press, 2008, page 317).

Under these circumstances it might seem a wise precaution not to endanger bank customers when reporting that they have received interest or dividend payments. The CRS announces which citizen violated Muslim laws even if the punishment is uncertain. Hopefully, lawmakers will grant financial institutions sufficient leeway not to endanger the well-being of their foreign customers.

On the other hand, I have not been to Indonesia and knowledge from books might not capture the practicalities on the ground.

The post Islamic law and the prohibition against interest: an impediment for CRS ? appeared first on Common Reporting Standard.

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