العدد الحالي: نيسان/ أبريل 83-2019       اختر عدد :
ترجم هذه الصفحة:
    بحث متقدم
A- A A+ : حجم الخط

Rulings of Employment in the Finance Industry in the USA

Dr. Main Khalid Al-Qudah

Member of AMJA fatwa committee

 

Part One

Introduction

All praise is due to Allah; we praise Him and seek His guidance. We seek refuge in Allah from the evils of our souls and our misconduct. Whoever Allah guides cannot be led astray and whoever He misguides cannot be guided. I bear witness and testify that there is no deity worthy of worship except Allah and that Muhammad (peace be upon him) is His servant and messenger.

For Muslims in America, employment in the finance industry is a topic of heated discussion because of the potential involvement in unlawful practices. Avoiding these unlawful practicesin a capitalist society that holds interest as one of its economic cornerstones is an issue of great concern.

The Assembly of Muslim Jurists of America (AMJA) often receives questions regarding the legality of job positions in this field and of some of the financial services offered. This is a strong indicator that there is a growing sense of religious awareness and devotion in the Muslim community. The multitude of questions AMJA receives in this regard also shows that, by Allah’s grace, the assembly garnishes a great deal of respect.

In an effort to cater to the Muslim community’s urgent need for religious instruction regarding employment in the finance industry, AMJA’s Leadership Council dedicated the assembly’s 5th annual convention to addressing its nuances.

Chapter One

An Overview of the Finance Industry

The finance industry comprises an intricate system of financial services so intertwined that each service can hardly be assessed independently. To shed light on the nuances of this industry, this section will assess the functions of keynote corporations that offer a wide range of financial services.

Developing a proper outlook on these nuances is paramount to offering juridical insight. As the scholars have expounded, sound judgment is the product of proper perception. The fiqh jurist is confined by the questioner in the sense that his answer is in part tailored by the framework imposed by the question. If the jurist has background information relevant to the question, he can circumvent any misinformation to which the question may allude.

In theory, one should evaluate insurance, finance, brokerage and all other services independently. However, in light of the complexity of modern economics, assessing each service independent of its correlatives is a premier challenge. As the reader will come to realize, it is impractical to find a single corporation that offers a financial service wholly independent of adjoining services.

Section One: Insurance

The American Automobile Association (AAA) is one of the leading insurance corporations. It offers a number of services including: (autoclubgroup)

1)    Home and life insurance

2)    Roadside Assistance: This service includes towing, flat tire and winching services, battery jump start and replacement services, vehicle lockout assistance, emergency fuel delivery, 24-hour customer support along with free AAA maps, tour book guides and TripTik routing maps. These services are included in the AAA membership package. 

3)    AAA Show Your Card & Save member program: AAA members earn special savings at a multitude of locations including shopping centers, restaurants, hotels, car rentals and more.

4)    AAA Driver Training & Education program

5)    Auto Loans & Refinancing program (wikipedia)

6)    AAA Car Care Plus Facilities: These automotive facilities provide auto repair and maintenance services and offer members special discounts.

7)    AAA Visa Credit Card: AAA coordinates with leading credit card companies to provide financial services to its members.

The services offered by the American Automobile Association (AAA) are by no means limited to insurance; they include loaning, finance and a multitude of other non-financial services.

Section Two: Banking

Bank of America is one of the leading financial corporations catering to consumer and commercial needs nationwide. It is also one of the leading credit card vendors internationally. The following assessment of its services will provided sufficient insight into the banking system.

The services provided by Bank of America include: (BankofAmerica) (wikipedia)

1)    Account Management: This includes checking accounts, savings accounts and certificates of deposit (CDs). Each of these accounts has unique benefits. However, the important difference relevant to this research is that checking accounts are usually non-interest bearing, whereas savings accounts and CDs accrue a fixed amount of interest periodically added to the account.

2)    Insurance: The various insurance policies at Bank of America are operated by a bank subsidiary known as Banc Of America Insurance Services, Inc.

3)    Credit Card Services: Some types of credit cards loosely fall under the term, such as Commercial Prepaid Cards. A Commercial Prepaid Card is a pre-funded card with a spending limit set by the amount of money one’s sponsor loads onto the card. Hence, it doesn’t reflect the technical fiqh definition of a loan.

4)    Mortgage loans: This loan comprises two transactions:

1.    Financial Lending: The lender, in this case the bank, purchases the property on behalf of the borrower and collects the sum total at interest in an agreement that can be thirty years long.

2.     Mortgage agreement: The bank places the property as collateral for the loan. This consequently limits the borrower’s ability to sell or transfer ownership of the property.

Another service provided is mortgage refinance loans, which is to basically replace an existing debt obligation with another debt obligation. This is commonly done to reduce the monthly payment and, in turn, the property owner agrees to a longer term.

5)    Home Equity: This refers to the difference between the home’s fair market value and the outstanding balance of all liens on the property. There are two different types of equity loans:

1.    Home Equity loans: The borrower uses the equity of his home as collateral in order to receive a loan with the sum of his equity. For example, if he paid 30% of the home’s value, which has a sum total of $200,000, he will receive a loan of $60,000 in return for placing 30% of his home as collateral.

2.    Home Equity Line of Credit (HELOC): The lender agrees to lend a maximum amount within a term where the collateral is the borrower’s equity. The borrower is not advanced the entire sum up front, and the loan does not exceed the amount of the equity.

6)    Individual Retirement Accounts (IRAs):  With this account, the bank offers the investor a variety of investment options. The IRA account holder accrues his profit by Speculation[1] via a brokerage firm in the stock and bonds market. These investment options are regulated by American law in order to protect the rights of taxpayers and to facilitate a way to build tax-deferred savings for retirement (Wikipedia).

7)    Mutual Fund: A mutual fund is a common collective investment option in the United States that pools money from many investors to purchase securities such as stocks, bonds and other money market instruments. The fund is operated by a portfolio manager who speculates the money markets with the investments. The money manager would provide potential investors with a disclosure document known as a prospectus that describes financial securities including material information about a company’s business, its financial records and its officers and directors. The prospectus is law-binding between the investors and the portfolio manager. There are many different types of mutual funds with varying degrees of risk (Colombiafunds). Some mutual funds provide safe financial gains, whereas others are high risk for investors. These high risk investments are known as hedge funds.

In return for offering this service, the bank gains a monthly rate from both the investor’s capital and profit.

8)    Wealth Management: This service incorporates financial planning, investment advice and other financial services usually for high-net-worth individuals (HNWIs). The bank offers these free services to gain the continued investments of its valued patrons.

9)    Personal loans, boat loans, auto loans and aircraft loans are all interest bearing loans.

10)                  International Banking: This service includes issuing traveler checks, which are pre-printed fixed amount checks for those who prefer not to carry cash in their travels. Traveler checks can be canceled immediately if lost or stolen. This service also includes currency exchange in which the bank benefits from the difference between the price of purchase and sale of foreign currency.

It is noteworthy that 90% of the bank’s income is from its financial activities within the United States. However, the bank’s international operations actively purchase international stocks, and that is the source of the remainder of its income.

Section Three: Mortgaging

Countrywide Financial is a mortgaging company that offers interest bearing loans. There are two ways that properties are mortgaged in the United States: (Wikipedia)

1)    Foreclosure: This is a legal process in which the lender obtains a court order or follows statutory procedure to sell the asset used as collateral for the loan. In attempt to recover the balance of a loan, the lender may foreclose the property if the borrower defaults on three consecutive payments. The foreclosure process can be slightly different from state to state.

2)    Deed of Trust: The lender does not need to follow a legal process or obtain a court order in order to sell the property. Trust deeds are prevalent in some states such as California. Foreclosures and trust deeds are both interest bearing transactions that involve collaterals.

  Countrywide Financial offers the following services:

1)    Home Ownership Mortgage Education (HOME) program:  This program educates customers on homeownership laws and regulations.

2)    Refinance

3)    Home Equity loans and Home Equity Lines of Credit (HELOC)

4)    Mortgage

5)    Reverse Mortgage: This is “a home loan that provides cash payments based on home equity. Homeowners normally defer payment of the loan until they die, sell or move out of the home. Upon the death of homeowners, the heirs either give up ownership to the home or must refinance.” (Wikipedia) This is usually practiced by retirees. The presence of interest and gambling and the uncertainty (gharar) posed by this transaction is evident.

Section Four: Credit Card Services

In essence, credit cards are issued as a financial lending tool. There are four major corporations that have monopolized this field in the United States, namely Visa Inc., MasterCard Worldwide, American Express and Discover Financial Services.

Although there are a number of different fees imposed by credit card corporations, the principle way they generate revenue is from interest. The following methods are all included in the credit card agreement: (Wikipedia)

1)    Interchange fees: Basically, when cardholders purchase merchandise that values $100, for example, the credit card company pays the seller only $97 or $98. The rest of the amount goes to service fees. The interchange rate defers depending on the credit card company, the state and the general economic conditions.

2)    Credit card companies often issue change of terms notices that may include higher interest rates for cardholders, even if they pay before the deadline.

3)    If a cardholder decides to make the minimum payments for his card balance (which can be as low as $10-$20) on the due date, an interest rate will be added to every payment. This is similar to the agreement in Jahiliyya known as "amhelni 'azedk" (i.e. add more and pay later) in which the borrower would request a payment deferral and in return he would pay more than the agreed amount.

4)    When the grace period finishes, an interest rate is added to the cardholder’s balance, even if he pays it in full.

5)    Overdraft fees: If the credit card limit is $1000, for example, the bank pays the extra amount and imposes an overdraft fee.

6)    A Non-Sufficient Funds (NSF) check is when the written amount exceeds the available balance, and in such a case, the cardholder is required to pay a penalty.

7)    Card withdrawals always have an interest rate.

8)    Some credit card companies charge annual fees.

9)    Currency conversion fees:  When a cardholder makes purchases abroad, the credit card company imposes higher conversion rates.

Evidently, the only services that may not include interest (riba) are the interchange fees, annual fees and currency conversion fees. All other services are interest bearing loans that are strictly prohibited by the Qur’an and Sunnah.

Section Five: Brokerage and Financial Advisory

Speculation in the money market is its own practice in the United States that has separate statutes and regulations. One of the regulations in the money market is that an investor must work through a brokerage firm to attain financial securities.  Brokerage firms serve their investor clientele by researching the markets to provide appropriate recommendations regarding the type and time of investments. The stockbrokers also represent their clients in purchases and sales in the stock market.

Fidelity Investments is a retail brokerage firm that offers the following services to its clientele: (Fidelity)

1)    Mutual funds

2)    Stock Trading: Fidelity speculates the stock and bonds market with the direct supervision of its clients. The service provided for major investors is known as Active Trading.

3)    Fidelity Individual Retirement Accounts (IRAs): This program provides a broad range of investment options and investment guidance for retirement planning. These accounts are not exclusive to employees; one can combine between an IRA and a 401 (K).

4)    401k Rollover Options: Rollover specialists assist employees in rolling their 401k from one company’s plan to another usually for better investment options.

5)    Special financial advisory for high-net-worth clients (HNWIs).

6)    Fixed Income Annuities: This plan helps the client turn a portion of his income into a guaranteed stream of income after retirement. There are specified fees by the company for this service.

7)    Fidelity assists businesses in hiring employees and filing their personal records.

8)    The company has investments in hotels, public transportation, the telecom industry, newspaper chains and in commercial lumber and building materials.

9)    Life insurance

Section Six: Multi-Service Finance Corporations

In the United States, some of the leading financial corporations offer a full range of financial services.

Citigroup is a premier example of this dynamic. This London based multinational corporation has a strong presence in the United States and plays a critical role in finance, investment, financial advisory and stock market brokerage. The only sector it has left untouched is insurance. (Wikipedia)

JPMorgan Chase & Co. is an American Multinational banking and financial services holding company. (Wikipedia) Historically, this New York based bank has played a pioneering role in the finance industry. It is perhaps the third most significant bank nationwide following Bank of America and Citigroup.

Since Chase bank is indigenous to the United States, it is perhaps the most suitable case study for multi-service financial corporations: (Chase)

1)    Common bank account options which are checking accounts, savings accounts and certificates of deposit (CDs).

2)    Issues credit cards

3)    The common loans such as home equity loans, mortgages, automobile loans and student loans.

4)    The Chase Insurance Agency offers life insurance policies.

5)    Retirement planning advice, financial advice on handling property assets and private client services for high-net-worth individuals.

6)    Brokerage services in local and international stock and bond markets.

7)    Three different types of annuities to its customers:

1.    Fixed Annuity: Under this policy, the bank guarantees a fixed interest rate to the principal of the annuitant. The bank makes fixed dollar payments to the annuitant for the term of the contract, usually until the annuitant’s death.

2.    Immediate Annuity: This policy guarantees that the issuer will make a series of payments. The payments are according to the sum paid by the annuitant at retirement regardless of the bank’s profit from the money.

3.    Variable Annuity: This policy guarantees a minimum payment by the issuer that may potentially increase depending on the performance of the managed portfolio.   

Chapter Summary

After explaining the functions of the various sectors in the finance industry, the following conclusions can be made:

1)    The services in the finance industry in the United States are strongly intertwined. It is very difficult to disassociate one service from the rest because in the insurance sector, for example, the same corporations that issue loans also issue credit cards. In the banking sector, the banks that offer insurance also speculate the money market and set up mortgages. The mortgaging sector also offers loans for purposes other than buying homes, and the financial advisory and brokerage sector also offers advice regarding life insurance.

The dynamics of this industry are not set in stone; just as there are multi-service corporations, there are other agencies dedicated to one service. Therefore, it is difficult to issue a ruling regarding one sector independent of the other sectors; the ruling must be general to the entire industry.

2)    Interest is considered a hallmark of capitalist economic systems; interest is rarely not factored into the equation.

 

Any given financial service is either purely interest bearing such as mortgages, saving accounts, certificates of deposit, most insurance policies, refinance and all forms of financial lending (home equity, student loans, personal loans, annuities, etc.) or usually leads to interest such as credit cards. Credit cards are not initially interest bearing, but they usually involve a great deal of interest. Most credit card holders in the US usually exceed the grace period one time or another or otherwise pay off their credit debts in multiple payments or overdraft their credit cards. In all of these cases, the credit card company would add additional costs to the cardholder’s original balance, and this is the essence of riba.

Similarly, checking accounts are usually non-interest bearing in the sense that the bank does not offer an interest rate for simply depositing money. However, the problem is that the bank invests a sizable portion of your deposit to achieve its endeavors, which do involve interest. Therefore, the account holder is supporting the bank in its illicit practice. Although this entails a lesser degree of unlawful practice because the account holder is not giving or taking interest, it nonetheless indirectly supports it.

3)    There are some financial services that do not involve interest such as currency exchange and the issuance of traveler checks. These services usually are in accordance with the regulations of monetary exchange in Islamic law. In terms of currency exchange, the monetary exchange usually occurs at the time of the transaction. The profit the bank gains by issuing traveler checks can be described as compensation for hiring services (Ijara) or Ja’ala[2].

Also, the fees that credit card companies charge business owners can also be described as compensation for hiring services (Ijara) because the credit card companies are providing the service of delivering the money paid by the customers via credit card.

Similarly, the fees for issuing a credit card and annual membership aren’t directly related to the loan.

Another example of a non-interest bearing financial service is the 401 (k) Rollover unless it involves investing the money in interest bearing companies. In that case, it would be prohibited from the aspect of supporting unlawful practices, not because of dealing in interest.

4)    There are non-financial services that indirectly lead to interest such as the H.O.M.E program, property management services and retirement planning. The H.O.M.E program informs customers of the regulations and statutes in place for mortgaging homes. Property management services offer financial advice, and retirement planning helps customers choose the best IRA plan.

5)    There are other non-financial services that do not lead to interest. As previously mentioned, Fidelity Investments has investments in telecommunications, transportation, hotels, commercial lumber and building materials and newspapers, and it also has employment and payroll agencies. Also, AAA offers driver’s education, auto repair and membership discount services. 



[1]This term refers to investment in stocks, property, etc. with considerable risk but offering the chance for large gains. (Translator)

[2] This is a non-binding agreement between the buyer and seller in which the compensation is specified but the job may have unknown variables. It differs from Ijara in that there doesn’t need to be a specific individual hired, the individual is only deserving of the compensation if the task is completed, and it cannot have a specific timetable. An example of Ja’ala is if one announces: Whoever finds and returns my lost possession will receive a $100 reward. (Translator)