Tuesday, September 4, 2012

A Deeper Dive into Islamic Finance

Ahmad recorded that Sa`id bin Al-Musayyib said that Umar said, "The Ayah about Riba was one of the last Ayat to be revealed, and the Messenger of Allah died before he explained it to us.'' Tafsir Ibn Kathir
Clarifying the meaning of Riba

A few weeks ago I summarized Allah’s guidance on commerce. Allah’s guidance is centered on the principles of truthfulness and fairness. Built into the doctrine of fairness is the idea that Muslims should not take advantage of people in distress. To that end, Allah banned riba. Today I am going to take a much deeper dive into that topic. The key takeaways are:

  • Riba Prior to the Prophet: During jahiliyyah riba was a penalty assessed for non-payment of a loan
  • The Context of Riba in the Quran: Riba was banned to prevent the exploitation of the poor, a group that deserves our charity
  • Did The Prophet Declare War on Riba?: No, this is a misunderstanding of a Quran verse
  • Riba Al-Nasiah: Phrase used by scholars to describe the riba banned by Allah. This is different from interest, which the Prophet traded in.
  • Riba in the Hadith: Although the hadith are very contradictory, the most accurate ones do not ban credit transactions. Credit transactions are described in the Quran.
  • Riba and Bankruptcy: Modern US bankruptcy law makes it virtually impossible to violate the Quran's rules on Riba. Debtor prisons in Muslim countries still violate the edict.
  • Modern Islamic Finance: Although begun with noble intentions, the movement was hijacked by a misguided war on interest. Today's Islamic Banks are completely unnecessary and only serve to overcharge Muslims.
Riba Prior to the Prophet

Riba literally means ‘increase’ in Arabic. In the Quran riba refers to a substantial increase of a debt after an initial contract for a debt has expired. Classical commentators of the Quran agreed that by banning riba, Allah ended the pre-islamic (jahiliyyah) practice of increasing a debt if it could not be repaid by a previously promised date:
Riba in the pre-Islamic Period consisted of the doubling and redoubling [of money or commodities], and in the age [of the cattle]. At maturity, the creditor would say to the debtor, “Will you pay me, or increase [the debt]? If the debtor had anything, he would pay. Otherwise, the age of the cattle [to be repaid] would be increased…If the debt was money or a commodity, the debt would be doubled to be paid in one year, and even then, if the debtor could not pay, it would be doubled again: 100 in 1 year would become 200. If that was not paid, the debt would be increased to 400. Each year the debt was doubled. Zayd bin Aslam (754 CE)
Several other classical scholars gave identical definitions including Imam Shafi’i (820 CE), Ahmed ibn Hanbal (855 CE), Tabari (923 CE), and Ibn al-Arabi (1148 CE). I have provided their definitons at the end of this blog post. Only 1 classical scholar disagreed with this view:
The riba which the Arabs new and practiced mean lending money[dirhams and dinars] with a specified maturity at an agreed upon increase over and above the sum borrowed. Al-Jassas’ Ahkam al-Quran (980 CE)
Analyzing Al-Jassas’s contrarian definition has caused numerous scholars to question it:
As Jassas’ assertion is not supported by historical evidence or reports and is, furthermore, not in line with earlier reports quoted by Tabari, his interpretation may be regarded unreliable. Abdullah Saeed
This definition by al-Jassas in the fourth century (hijra) is fundamentally different from those reported from earlier authorities. In the definitions reported by Malik, al-Tabari, and al-Suyuti from much earlier sources the focus is on the increase in the outstanding loan when it could not be paid, on due date; there is no mention of the terms of the original loan. In contrast, in the definition given by al-Jassas the focus shifts to the terms of the original loan; no mention is made of what happens at the time the payment is due. Moreover, in the earlier reports the loans mentioned arose out of sales with deferred payment, whereas in the definition given by al-Jassas the loans are said to be cash advances. Ahmad Shafaat
Maulana Maududi from Pakistan based an entire book on this contrarian definition, assuming that this was the default definition used by all scholars:
The conclusion of Abu Bakr Jassas is that when the ignorant people borrowed from each other, they made a contract that at the end of a certain period of time a fixed amount shall be paid in excess of the principal…[Riba]denotes “excession to wealth and an addition to the principal” Maulana Maududi’s The Economic System of Islam (1977 CE)
Maududi's confusion aside, we have a very stable and enduring consensus around the riba described in the Quran.

The Context of Riba in the Quran

All of the examples we have of pre-islamic riba involve poor people seeking loans to feed themselves and having those loans increase in size when they are not paid on time. Allah first banned riba in the middle of his commentary on the Muslim loss at the battle of Uhud, ostensibly because of the needs of the widows and orphans of the 70 dead Muslim soldiers:
You who believe, do not consume usurious interest (riba), doubled and redoubled. Be mindful of God so that you may prosper Quran 3:130
Instead, Allah encouraged Muslims to give charity, ostensibly to help the widows and from the battle:
Hurry towards your Lord’s forgiveness and a Garden as wide as the heavens and earth prepared for the righteous, who give, both in prosperity and adversity, who restrain their anger and pardon people—God loves those who do good— Quran 3:133-134
Allah continued to express his disdain for riba throughout the Quran. The most quoted example is [note: Haleem and others translate riba as ‘usury’]:
But those who take usury will rise up on the Day of Resurrection like someone tormented by Satan’s touch. That is because they say, ‘Trade and usury are the same,' but God has allowed trade and forbidden usury. Whoever, on receiving God’s warning, stops taking usury may keep his past gains—God will be his judge—but whoever goes back to usury will be an inhabitant of the Fire, there to remain. God blights usury, but blesses charitable deeds with multiple increase: He does not love the ungrateful sinner. Quran 2:275-276
Al-Wahidi (1075 CE) explains that this verse was revealed to address a debt made by Abbas ibn ‘Abd al-Muttalib to a man who could not pay him back on time:
ʿAṭāʾ al-Khurāsānī  (752 CE) and Ikrimah ibn Abi-Jahl (636 CE) also said: “This verse was revealed about al-‘Abbas ibn ‘Abd al-Muttalib and ‘Uthman ibn ‘Affan who had lent someone dates. When it was time for the collection of the dates, the owner of the dates said to them: ‘If you take all of what is due to you what remains will not be enough for me and my dependents. Why do you not take half of what is due to you and I will double the interest that was initially agreed?’ They both agreed. When the term was due, they both asked the man to pay what was agreed. This reached the Messenger of Allah, Allah bless him and give him peace, and he warned them against going ahead with it... Asbab al-Nuzul
This narration reveals a lot about the behavior Allah found unacceptable. Although the initial debt contract did contain interest, it was the doubling of the interest after the repayment date that got the Prophet’s attention. The debt also involved a man paying for food for his family, with the alternative being starvation. Allah’s solution to the inability of the debtor to pay was:
If the debtor is in difficulty, then delay things until matters become easier for him; still, if you were to write it off as an act of charity, that would be better for you, if only you knew. Quran 2:280
We can be confident about the authenticity of this story because it is specifically referred to in the Prophet’s farewell address which says:
Verily, every case of Riba from the Jahiliyyah is completely annulled. You will only take back your capital, without increase or decrease. The first Riba that I annul is the Riba of Al-Abbas bin Abdul-Muttalib, all of it is annulled. The Farewell Sermon
The idea that Allah contrasts riba for non-payment of loans with charity to the poor and destitute is a powerful one. Allah continually stands up for the poor, orphans, and widows in the Quran. By banning riba, Allah is making a statement about exploitation of the poor. Allah constantly tells Muslims in the Quran that it is their duty to care for the poor with charity and alms, and by banning riba he is telling us that the poor are not meant to be exploited for profit. With this understanding, the following two verses make a great deal of sense:
So give their due to the near relative, the needy, and the wayfarer—that is best for those whose goal is God’s approval: these are the ones who will prosper. Whatever you lend out in riba to gain value through other people’s wealth will not increase in God’s eyes, but whatever you give in charity, in your desire for God’s approval, will earn multiple rewards. Quran 30:38-39
God blights usury (riba), but blesses charity (sadaqa) with multiple increase: He does not love the ungrateful sinner. Quran 2:276
So by banning riba, Allah not only made it clear that we are not supposed to increase the interest rate of loans to distressed borrowers, but we are also reminded about our duty to care for the poor as charity. A common theme in the hadith:
Abu Sa'id al-Khudri (Allah be pleased with him) reported that in the time of Allah's Messenger (may peace be upon him) a man suffered loss in fruits he had bought and his debt increased; so Allah's Messenger (may peace be upon him) told (the people) to give him charity and they gave him charity, but that was not enough to pay the debt in full, whereupon Allah's Messenger (may peace be upon him) said to his creditors:" Take what you find, you will have nothing but alms.” Sahih Muslim 10:3777
Did The Prophet Declare War on Riba?

There seems to be some confusion around verse 2:279 and its context. Some Muslims interpret the verse as a literal call to arms against riba. As al-Wahidi explains, the tribe of Banu ‘Amr  ended war with the Prophet by converting to Islam and signing a treaty. Although the treaty promised that their debts would be repaid, they mis-interpreted the treaty to apply to their riba payments as well:
“We heard, and Allah knows best, that this verse was revealed about the Banu ‘Amr ibn ‘Umayr ibn ‘Awf, from Thaqif, and Banu’l-Mughirah, from Banu Makhzum, because Banu’l-Mughirah used to borrow from Thaqif money with usury. When Allah, exalted is He, made His Messenger conquer Mecca, He abolished all usurious transactions. Banu ‘Amr ibn ‘Umayr and Banu’l-Mughirah, then, went to see ‘Attab ibn Usayd who was in Mecca. Banu’l-Mughirah said: ‘Why are we the most wretched of all people? Usury has been cancelled from amongst people, but we still pay it’. The Banu ‘Amr ibn ‘Umayr said: ‘The treaty that we have stipulates that usury is paid to us’. ‘Attab sent a letter to the Messenger of Allah, Allah bless him and give him peace, regarding this matter. Then this verse and the verse after it. The Banu ‘Amr knew that they would not be paid usury when the result involves a war from Allah and His Messenger. Asbab al-Nuzul
The verse reads:
You who believe, beware of God: give up any outstanding dues from usury, if you are true believers. If you do not, then be warned of war from God and His Messenger. You shall have your capital if you repent, and without suffering loss or causing others to suffer loss. Quran 2:278-279
The purpose of the verse is not to declare war on anyone charging riba, but instead to remind the people of Banu ‘Amr that by charging riba they would be violating their treaty and resume their war with the Prophet.

Riba Al-Nasiah

The riba that has been forbidden in the Quran is called riba al-nasiah. Nasiah is the arabic word for postponement, and refers to the penalty charged to the borrower for postponing the repayment of the loan. Outside of the Quran verses and context mentioned above, there is a rich collection of hadith that refer to ribah al-nasiah, the most explicit example being:
…It also resembles the hadith of Zayd ibn Aslam about the transactions of the people of the Jahiliyya. When their debts were due, they said to the person with the debt, 'Either you pay in full or you increase it.' If they paid, they took it, and if not they increased debtors in their debts, and extended the term for them." Malik’s Muata Book 31, Number 31.38.84
And to be perfectly clear, riba does not include the originally agreed interest rate. The Prophet himself paid premiums on top of his debts:
Narrated Jabir ibn Abdullah: The Prophet (peace_be_upon_him) owed me a debt and gave me something extra when he paid it. Sunan Abu-Dawud 22:3341
Many popular Muslim scholars use al-Jassas’s minority opinion to create a ban on all interest bearing transactions despite the consensus of classical scholars and numerous hadith that point to only the penalty interest amount. Although al-Jassas did not provide justification for his definition, modern anti-interest scholars like Maududi rely on his analysis to cement their claim.

Riba in the Hadith

As mentioned above, the final prohibition of riba occurred right before the Prophet’s farewell address and death. The proximity between the prohibition and the Prophet’s death was so close, that the companions complained that the Prophet never fully explained riba to them:
Umar bin Al-Khattab, said, "I wished that the Messenger of Allah had made three matters clearer for us, so that we could refer to his decision… some types of Riba.'' Tafsir Ibn Kathir
The most authentic tradition we find in the hadith is an explanation given to Ibn Abbas. It only makes sense that the most accurate hadith deals with Ibn Abbas getting an explanation for riba, as the verse probiting riba was directed at one of his loans, and the Prophet refers to his riba in the farewell address. Redundantly reported in at least three major collections we have:
Abu Salih reported: I heard Abu Sa'id al-Khudri (Allah be pleased with him) said:... I met Ibn 'Abbas and said: Do you see what you say; have you heard it from Allah's Messenger, or found it in the Book of Allah, the Glorious and Majestic? He said: I did not hear it from Allah's Messenger . and I did not find it in the Book of Allah, but Usama b. Zaid narrated it to me that Allah's Apostle said: There can be an element of riba in credit. Sahih Muslim 10:3876 / Sahih Bukhari 3:34:386 / Similar Sahih Muslim 10:3879 and Jami at-Tirmidhi 10:41 (Chapter 24/1241)
In this case, Abu Sai’d al-Khudri is correcting Ibn Abbas’ definition of riba by quoting Usama bin Zaid. Usama bin Zaid reported that riba can result from credit sales (ie, when the creditor defaults on the loan) in addition to overcharging for a commodity (discussed earlier in the hadith). Oddly enough, this conversation is chopped up and repeated across several hadith, with several details changed from narration to narration, and the warning about credit turned into a prohibition of credit transactions. In this table I lay out all the hadith on this topic and note 1: which commodities are mentioned, 2: if they stress trading a commodity based on accurate weight (Like for Like?), 3: prohibit trading one commodity for another (Other Unequal?) and finally 4: condemn credit transactions as riba (Credit?):

To be blunt, some of these hadith have to be wrong, with varying definitions of the commodities being regulated, the need for equal weight, and mixed opinions on the ability to trade different commodities of varying weights with each other. Sahih Muslim 10:3876-9 / Sahih Bukhari 3:34:386 / Tirmidhi 1241’s interpretation is the one I trust the most for 4 reasons.
  • We have independent confirmation for the same hadith across three different collectors
  • The hadith involves Ibn Abbas whom we know is the subject of the Quran verse and the Prophet’s farewell address
  • Narrations that don't mention Ibn Abbas are unlikely because the companions complained that they never got an adequate explanation from the Prophet
  • We know that some credit transactions are acceptable because the Prophet engaged in them and the Quran gives detailed instructions on how to capture a credit transaction (Quran 2:282-283 )
I believe that the Prophet warned that some credit sales could lead to riba (which also agrees with the Quran’s context) and that the hadith forbidding all credit sales are wrong because they contradict the stronger hadith and the Quran.

Oddly enough, if one accepted the prohibition on all credit transactions as Abu Dawud 22:3343 suggests, then all transactions would need to be cash based, with full payment prior to any exchange. This view is pushed by none of today's Islamic Banks, and clearly runs contrary to Allah's goal of providing assistance to the poor and his instructions on contracting for debt:
Narrated Ubadah ibn as-Samit: The Apostle of Allah (peace_be_upon_him) said: Gold is to be paid for with gold, raw and coined, silver with silver, raw and coined (in equal weight), wheat with wheat in equal measure, barley with barley in equal measure, dates with dates in equal measure, salt by salt with equal measure; if anyone gives more or asks more, he has dealt in riba. But there is no harm in selling gold for silver and silver (for gold), in unequal weight, payment being made on the spot. Do not sell them if they are to be paid for later. There is no harm in selling wheat for barley and barley (for wheat) in unequal measure, payment being made on the spot. If the payment is to be made later, then do not sell them. Sunan Abu Dawud 22:3343
And as a reminder, the Quran's formula for recording debt is:
You who believe, when you contract a debt for a stated term, put it down in writing: have a scribe write it down justly between you. No scribe should refuse to write: let him write as God has taught him, let the debtor dictate, and let him fear God, his Lord, and not diminish [the debt] at all. If the debtor is feeble-minded, weak, or unable to dictate, then let his guardian dictate justly. Call in two men as witnesses. If two men are not there, then call one man and two women out of those you approve as witnesses, so that if one of the two women should forget the other can remind her. Let the witnesses not refuse when they are summoned. Do not disdain to write the debt down, be it small or large, along with the time it falls due: this way is more equitable in God’s eyes, more reliable as testimony, and more likely to prevent doubts arising between you. But if the merchandise is there and you hand it over, there is no blame on you if you do not write it down. Quran 2:282
So we reject Sunan Abu Dawud 22:3343 for contradicting Quran 2:282. The Quran is the word of God, while the hadith is just a recorded tradition.

Riba and Bankruptcy

Bankruptcy occurs when a person or company is unable to service their debts. The riba verses in the Quran prohibit taking advantage of people who are bankrupt by assessing even more debts on them. Prior to the 19th century, punishments for bankruptcy were severe around the world. The ancient Greeks turned bankrupt families into slaves until they could repay their debts, the Mongols put anyone who declared bankruptcy three times to death, and the English imprisoned debtors.

Relative to the rest of the world, the Torah, seen by Muslims as a fore-runner to the Quran,  provided extreme leniency to debtors. The Torah declared that all debts were forgiven every 7 years:
"At the end of seven years make a release. And this is the substance of the release: every one who has a loan by his fellow shall not dun each one his brother, for he has called a release to God. . . Beware that there should be an empty thought in your heart saying, the seventh year is coming, the year of the release; and your eye is against your needy brother and you don't give him [a loan]; and he will call to God against you, and it will be considered for you a sin" (Deuteronomy 15:1, 9)
Although the details of the leniency offered to the poor are different from the Quran, the sentiment is the same, that unpayable debts from the poor are meant to be forgiven as an act of charity (Quran 30:38-39 and Sahih Muslim 10:3777).

The modern world began to turn to the Judeo-Muslim view of bankruptcy in two distinct steps. The first was the British Limited Liability Act 1855 which limited the amount of liability a shareholder in a company could face in the event of a business failure. If the Limited Liability Act applied the the Orchard owner in Sahih Muslim 10:3777, he would only have to pay back his lenders the limited liability amount. The British largely eliminated imprisoning debtors with the Debtors Act of 1869 for personal debts. Most states in the US ended debtors' prisons in the 1850s.

Modern bankruptcy law protects individuals from true destitution by protecting a portion of their assets, while distributing the rest of their assets to their creditors. If the assets exceed the debts, then the individual can keep the remaining assets. If the assets are less than the debts, the remaining balances are forgiven. Bankruptcy, as practiced in the US, virtually eliminates the risk of committing riba, and is extremely close to the Quranic law on the topic.

Sadly, most Muslim countries, which shun interest in transactions because they fear riba is interest, commit riba by imprisoning their impoverished citizens for running up debts. In Dubai, debtors in prison have resorted to hunger strikes. Debtors are imprisoned in the UAESaudi Arabia, Iran, and other Muslim countries. How this is compatible with Quranic teachings is beyond my understanding.

Modern Islamic Finance

The classical interpretation of riba is devastating to today's Islamic finance industry, which is completely driven by a desire to avoid all interest in all transactions. Modern Islamic Finance is based on the ideas of Mirza Ahmad, the second leader of the Ahmadiyya movement, with his books Nizame Nau (1941 CE) and Islam ka Iqtisadi Nizaam (1946 CE).  These ideas were repeated with mainstream Shiite proofs by the Shia cleric Baqir al-Sadr’s Iqtisaduna (Our Economics) in 1961. Ahmad El Najjar created the world’s first “Islamic Bank” in 1963 in the Egyptian town of Mit Ghamr. West German educated El Najjar based the Mit Ghamr Savings Bank on German mutual saving schemes popularized after World War 2. El Najjar’s bank focused on helping the poor setup small businesses through profit sharing contracts called muḍārabah and mushārakah. His uncle, Abdullah al-Arabi, wrote the first sunni papers about Islamic banking in 1966 describing a mudarabah based profit sharing scheme. In 1977, Maududi (whose alternative definition of riba was discussed above) wrote Economic System of Islam, which changed the focus from profit sharing to a blind war on all forms of interest and profit:
But lift this curtain of gullbility and see the reality hidden behind it. The first service rendered by Interest is that it abolishes all other interpretations of 'profit' and 'profitability' save the one which equates 'profit' with 'monetary profit' and 'profitability' with 'material profitability.' In this way capital acquires a single track mind. Previously it could flow into channels which promised profits other than money. Now it goes straight in the direction of guaranteed monetary profit. Maududi's Economic System of Islam
In a mere 16 years El Najjar’s idealized vision of adapting a German system of finance based on profit sharing to help the poor was replaced by a religious war on all forms of interest and profit. This focus on interest has been repeated by multiple Muslim revival groups focused on building separate systems from the west. Hizb ut Tahrir, which describes itself as 'a product of the dynamic teachings of Maulana Abul Ala Maududi',  published their own version of The Economic System of Islam in 2000 in which they claim:
Shar’a prohibited usury absolutely, regardless of its percentage, whether it was high or low. The usury gain is definitely Haram; nobody has the right to own it, and it has to be returned to its original owners if they were known...If usury was eliminated then there would be no need for the banks,which exist today. The Bait ul-Mal (treasury fund) will remain the only lender of property without interest after ascertaining the possibility of benefiting from the property. ’ Hizb ut Tahrir's The Economic System of Islam
This single minded focus on interest as the primary perpetrator of riba opened the door for the current dominance of murābaḥah mark-up loans in Islamic Finance circles.

Whereas mudarabah is focused on profit sharing to invest in commercial goods (like american venture capital), murabahah is focused on creating inflated sale prices of personal goods like cars and houses which are then sold in installments to the moderately wealthy. Obsessed with eliminating interest from transactions, murābaḥah mark-up loans, which make up 75% of Islamic-banking assets today, offer a fixed margin to banks to assist an asset purchase along with healthy late fees for those installments. These are essentially western style loans with an arabic sounding name, but with a blessing from an Islamic scholar. The most notorious of these scholars is Shaikh Nizam Yaqubi who blesses transactions for over 50 Islamic banks in exchange for consulting fees.

Let’s look at the difference between a conventional 30 year mortgage to purchase a home versus a murabaha markup loan. With a conventional mortgage, the buyer makes an initial payment for 20% of the value of a home, and then makes monthly payments against a predetermined interest rate. If the buyer can no longer make payments, they can declare bankruptcy and reach a negotiated settlement with their creditors for an amount less (never higher) than their current obligations determined by a bankruptcy judge.

In the murabahah example from UIFC, which has a fatwa from Sheikh Yaqubi approving it,  the buyer makes an initial payment for 20% of the value of a home, and then makes monthly payments against a predetermined final home cost pegged to today’s prevailing interest rates plus a surcharge to make the transaction “attractive to UIFC or any Murabaha Investor.” The monthly payments are made "interest free" against this grossly inflated sales price. If the buyer can no longer make payments, they are subject to predetermined late fees, and can declare bankruptcy and reach a negotiated settlement with their creditors for an amount less than their current obligations determined by a bankruptcy judge.

In other words, the only effective differences between a murabaha markup loan and a conventional mortgage is the fatwa and the increased interest rate to make the transaction “attractive to UIFC or any Murabaha Investor.” These transactions are so similar to mortgages, that murabaha banks sell their portfolio of loans to other non-Islamic institutions. UIFC explains this away by saying “UIFC acts as an agent for University Bank to buy and sell homes. As a technical matter of Shariah, that investor and any of its business partners may ultimately hold the right to collect installment payments.” The home buyer even gets an interest tax deduction via a 1098-INT statement for the IRS to account for the "interest -free" markup!

For a thorough takedown of the Islamic Finance industry, read Mahmoud El-Gamal’s book Islamic Finance: Law, Economics, and Practice.

My Take

The current desire to remove interest from the financial system in the name of “Islamic Finance” is fundamentally misguided. Allah banned riba to prevent the exploitation of the poor. Riba is the imposition of an unfair penalty on a distressed borrower, and has very little to do with the highly regulated loans of today. Whereas debtors' prisons, universal defaults, and cash-advance loans probably qualify as riba, the average Texan has relatively low risk of running into riba with car loans, mortgages, or -as some extremists disagree with- insurance.

Ahmed El Najjar’s original idea behind Mit Ghamr Savings Bank was executed in both the spirit and the letter of Allah’s guidance surrounding credit transactions. He not only avoided riba by creating profit sharing schemes with the poor, but designed a system to reuse their capital pull them out of poverty. Muhammad Yunus’ Grameen Bank in Bangladesh accomplishes the same goal with traditional loans, and also stays away from riba by avoiding the harsh penalties forbidden by the Quran. Here in Texas, American bankruptcy laws protect borrowers from paying outsized penalties by lowering their payments, never increasing them. The debtors’ prisons described by Charles Dickens simply do not exist anymore. Although there is currently a movement to revive debtors' prisons in the US, they relate to an inability to pay criminal fines, not for defaulting on loans.

It is sad that today’s scholars are being paid to peddle murābaḥah markup loans. Nothing more than conventional interest bearing loans, they hide their interest charges behind a veil of usage agreements, late fees, and rent, resulting in Muslims paying a much higher effective interest rate for a transaction. These transactions may have fancy sounding arabic names, but are just conventional interest behind all the smoke and mirrors. The sad irony is that conventional interest is perfectly halal.

The original intentions behind Islamic Finance were very laudable, but are fundamentally different than the folks peddling Islamic Finance and Islamic Banking today. The war on interest is completely misguided. Those that wish to truly avoid riba should devote themselves towards alleviating poverty, a much more difficult task than avoiding bank interest. As Allah reminds us:
Appendix: Additional Classical Scholars defining Riba:
“And al-riba (may be found) when a man is indebted to another, and the debt is due, and [the second: the lender] says [to the first: the debtor]: Would you pay the debt (dayn) or pay [in addition] riba? Payment would be postponed, [in the latter event,] but the debt would grow larger.” Imam Shafi’i (820 CE)
The manifest riba about which there could be no ambiguity is this; that someone is indebted to another and the creditor asks the debtor whether he is ready to pay the debt or would alternatively agree to an increase in the principal loaned out to him.  If the debtor is not able to pay, then the creditor increases his principal as well as the term of repayment. Ahmed ibn Hanbal (855 CE)
The way pre-Islamic Arabs used to consume riba was that one of them would have a debt repayable on a specific date . When that date came the creditor would demand repayment from the debtor. The debtor would say, ‘Defer the repayment of my debt; I will add to your wealth.’ This is the riba which was doubled and redoubled. Tabari (923 CE)
Riba was well known among the Arabs. A person would sell something on a deferred payment basis. Upon maturity the creditor say: “Will you pay or will you add an amount to the debt?” Ibn al-Arabi (1148 CE)