Misunderstanding Ribaa and the Fraud of Islamic Banking

 

Misunderstanding Ribaa and the Fraud of Islamic Finance

M. Bakri Musa

November 8, 2026

Excerpted from my book Qur’an, Hadith, and Hikayat: Exercises In Critical Thinking (2021).

The caricature of a Malay as someone who lives entirely in the present—indifferent to the future, devoid of thrift, and lacking economic ambition—still finds widespread acceptance. Worse, this toxic trope is endorsed not just by non-Malays but also by contemporary Malay leaders. Tun Mahathir has built a late-life cottage industry out of lecturing Malays on our alleged sloth and economic short-sightedness.

That saving for tomorrow is alien to the Malay mindset was the conventional wisdom during my childhood in colonial Malaya. The British colonialists were not without basis for their stereotyping. They misread Malay behavior through their own narrow cultural lens, but the data they observed was real enough.

In the 1950s, colonial administrators decided to encourage rural Malays to save by raising the Postal Savings Bank’s interest rate from 2.5 to 3.0 percent. The result stunned the colonial bureaucracy.  Instead of an influx of deposits, poor rural Malays rushed to withdraw what little money they had entrusted to the system.

As an aside, a step up from 2.5 to 3.0 percent is not a mere “half-a-percent” increase. It is a 50-basis-point jump—a full 20 percent increase in yield. That arithmetic distinction needs emphasizing, given Malaysia’s recent and abysmal PISA performance in quantitative literacy.

To the British, this response was baffling. To kampung folks, the math was secondary to their theology. Word spread rapidly across the villages that the sudden hike in interest was but a sly colonial scheme to entice pious Muslims into a life of sin. The mass withdrawals only solidified the colonials’ prejudiced conclusion: Malays simply lacked any concept of financial foresight.

 

The Genius of Ungku Aziz

Enter the late economist Royal Professor Ungku Aziz. Contrary to the colonial narrative, Ungku Aziz recognized that rural Malays were in fact diligent savers. One only had to walk into any traditional kampung house to see the proof. Hanging from the central roof beam was the tabung—a segment of bamboo stem cut between two nodes, with a narrow slit chiseled just below the top node.

Into that slot families routinely slipped their spare coins and the occasional paper ringgit. On special occasions—a daughter’s wedding, seasonal feasts, or the ultimate aspiration: the Hajj pilgrimage to Mecca—the bamboo stem would be split open.

Malays did not avoid institutions like the Postal Savings Bank out of a lack of thrift. They avoided them because of the Qur’anic prohibition on ribaa, which local religious authorities had simplistically—and erroneously—equated with any and all bank charges.

Capitalizing on this astute cultural observation, Ungku Aziz designed the Pilgrims Savings Fund in 1962—what we now know as Tabung Haji. He brilliantly combined the physical symbolism of the traditional bamboo tabung with the sacred spiritual obligation of the Hajj.

Tabung Haji operated as a conventional deposit-taking collective investment scheme. However, it introduced two crucial structural shifts to address local sensitivities. One, it offers no guaranteed rate of returns. It eliminated fixed interest rates, bypassing the traditional objection to ribaa. Tabung Haji functioned essentially as a equity-based mutual fund rather than a commercial bank. The fund invests only in halal enterprises, explicitly excluding gambling, alcohol, armaments, and speculative ventures.

Long before Western asset managers coined the term Socially Responsible Investing (SRI) or ESG (Environmental, Social and Goverance), Ungku Aziz had operationalized it in rural Malaya. Today, sovereign wealth titans like the Norwegian Government Pension Fund Global are celebrated as pioneers of ethical screening. Meanwhile Tabung Haji was executing that exact mandate decades earlier.

The willingness of poor rural Malays to pool their hard-earned capital into an un-guaranteed fund demonstrated high financial maturity. They responded because the vehicle was aligned with their values. Tabung Haji grew into one of the largest financial institutions in Southeast Asia—a testament to what happens when an economist views local reality through critical inquiry rather than imported dogma.

 

The Decay of Innovation

The success of Tabung Haji should have catalyzed a wave of financial engineering across the Muslim world, especially as Malaysia produced thousands of home-grown economists, accountants, and MBAs over the subsequent decades. Regrettably, no one picked up the baton.

With competent, forward-looking management, Tabung Haji should have evolved into an international hospitality and aviation giant. It ought to operate its own global hotel chains, charter fleets, and logistics services for pilgrims, while extending non-usurious, equity-based commercial finance across ASEAN. What benefits Muslim depositors through ethical management should naturally appeal to non-Muslim investors as well.

Instead, Tabung Haji became bogged down by the familiar maladies of the Malaysian political economy: corruption, political patronage, and managerial lethargy. Cronies with political connections replaced visionary technocrats. Innovation grounded to a halt, replaced by financial engineering designed to obscure balance-sheet deficits and pay out unsustainable political dividends.

Far from serving as a global model of ethical equity finance, the broader “Islamic Banking” sector that followed in Tabung Haji's wake largely abandoned Ungku Aziz's spirit. Rather than eliminating ribaa through genuine risk-sharing, contemporary Islamic finance has largely reduced itself to legalistic sleight-of-hand—repackaging standard interest-bearing debt behind Arabic nomenclature like Bay' al-'Inah and Tawarruq.

 

Next:  The Ugly Reality of Retail Islamic Banking and Finance