-Riba Vs Interest


Riba Verses Interest

Borrowing money or commodities had always been the need of our socio-economic growth & overall progress in various disciplines of human requirements, but if there are some prohibitions, or restriction for the follower of a faith group to comply with a religious restriction, like concept of riba, usury or interest for Muslims, then we have to evaluate and see how these terms are & how the terms being interpreted, and applied to the existing borrowing system in place and what kind of interest bearing financial transactions fall within the category of riba and what option are available for Muslims to comply with, in today’s progressing global world.

Riba is a pre-Islamic word indicating increase, growth or in excess, in a deal between two or more people relating to commodities or money borrowing. It is also considered as Usury charges on loans, at the time of payment. In Islamic countries interest base financial system is considered forbidden due to the interpretation and understanding of the word riba and its equation to modern day banking interest. Often Riba, usury & interest are used synonymously and had been subject of interest, confusion and misunderstanding throughout the Muslim World.

Historical background

During pre-Islamic era, it was customary to borrow gold, silver, metals, live stocks and item of food (wheat, barley and agricultural products etc.) to fulfill the requirement of a needy person, however, in accordance with the deal, if the borrower fails to return the items he borrowed at the preset time or in case of default; the lender often used to increasing the amount out of proportion, charging double or multiple time of the original amount according to his own discretion. Borrower had no say in it and there was nothing to control this trend which is basically an exploitation of the situation to weaken or destroy the borrower. As Muslims were also part of the society, they had to deal with the same prevailing trend.

To address this trend, Allah, had sent a few revelations (30:39, 4:161, 3:130-2, 2:275-8 etc) and advised Muslim Ummah to refrain from Riba.

Quranic verses relevant to riba and prophet’s saying on this subject of riba came during the last phase of prophet’s life and hence companions did not have enough time to get proper explanation of riba and its scope, depth or implications on Muslims Economical and Financial System.

Consequently Muslims around the world are confused and polarized on the subject of Riba as compared to interest in modern day banking system. This uncertainty, surfaced due to the vagueness in the definition of riba and its rules. Even, Linguistic explanation of riba does not cover explicitly its scope as any legitimate increase of profit is also an increase. Hence riba falls with in the subjects of interpretation and needs to be addressed in order to rectify the misunderstanding about interest.

Riba and Interest Equation

Throughout the history of Islam many scholars, intellectuals & Muslim jurists have tried to address this issue and provided their opinion about riba and usury. Based on Quranic verses and prophetic hadith, majority of jurists concluded that riba and usury are forbidden but they did not come explicitly clear in equating riba to interest and in declaring that interest is the same as riba or usury and hence not allowed.

General consensus (ijma) among Muslim Scholars equating Riba to Banking Interest, is still questionable due to vagueness in the definition of riba and it requires ijtihad to resolve this issue.

Option to Riba and Interest

During last few decades some scholars came up with the idea of Islamic Banking. In reality there is no such thing like Islamic or Non-Islamic banking. It is more or less the same as western banking system except that we have changed the name and modified few parameters to make it look justifiable. This concept of Islamic Banking and Housing is being tried on small scale in some Muslim countries but it does not have the scope to cover all financial transactions. A vast majority of people still pay interest on loans and even the government’s loans bear’s interest clause in dealing with IMF & other financial institutes giving loans to Muslim Countries. We can persuade few banks to adopt a banking system in which interest is not paid on deposits as it would be in their interest but how many will give loans free of charge or interest?

The so called Islamic Banking System may satisfy the concerns of those Muslims who have not studied the divine message on riba and usury and are equating riba to interest in current modern day banking system. However, in reality Riba and Interest are totally out of phase and different in its meaning and application. Muslims in general have not conceived the difference between riba and interest and are still inquiring about the permissibility of interest and hence this topic is a common discourse in our gathering & meeting either at home or mosques. Currently there is no unanimity of opinion on this question.

Permissibility of Current Banking Interest

In modern day banking system, interest on loans is a common factor and we have to face the dilemma of its permissibility. Those who equate Riba to interest, are also part of our society and do deal with banks in keeping accounts and buying home, cars and expensive items on loans but when it comes to express their stance on this subject, most of them will say interest is not permissible.

Considering post Islamic era and current financial aspect of our lives, many scholars of our time have studied the subject comparing prevailing circumstances then and now and came to conclude that Riba is not the same as ‘Interest’, in modern terminology of banking system and hence banking interest is permissible.

Questions regarding the permissibility of Interest were also referred to many famous Muslim Jurists who have taken into consideration all relevant factors (quranic verses, hadiths & current financial system) and came up with the resolution that current day banking interest system is permissible.

Some views of Islamic Jurists

1. Banking interest compared to Riba, issue was referred to Al-Azhar's Islamic Research Institute, which issued a creed in Nov 2002 stating that current day banking ‘interest’ is not the same as riba and hence Muslim can use it.

This decision was made in order to cope with the changing world. It is quite illogical to remain frozen while the world is changing around us and we are not keeping pace with the changing world. Many modern scholars of fiqh & Quran also translate riba as usury and not as simple banking interest.

2. Sheikh Muhammad Sayyid Tantawi, Grand Mufti of Egypt and a scholar of Al-Azhar, had declared in 1989 that interest on certain interest-based government investment is not forbidden riba. His fatwa aroused a storm of controversy with opposition from all traditional religious scholars. He also said that interest bearing banking deposits are perfectly Islamic. He suggested that laws should be amended to change the legal terminology used for bank interest and bank accounts to clarify their freedom from the stigma of riba.

3. In early sixties , Prof. Fazlur Rehman, of U of Karachi had also challenged the traditional position of Riba-Interest Equation and concluded that banking interest is not the same as riba and hence permissible.

4. Abdullah Yusuf Ali said that though riba is prohibited but regarding the definition of Usury, there is room for difference of opinion. In Yusuf Ali’s opinion, usury would be undue profit made out of loans of gold and silver and necessary articles of food such as wheat, barley, dates and salt. His definition would include profiteering of all kinds but exclude economic credit, the creature of modern banking and finance.

Islamic jurists, during last few centuries have had spent much time in coming out with their research and finding regarding Usury, based on economic conditions as they existed at the rise of Islam. Most agree on main principles but there is difference of opinion on the definition of Usury.

Now considering above mentioned ijtihads of Islamic Jurists, I would like to say following in light of definition and historical background relevant to the subject.

To understand the issue of Riba, we may have to revisit the early history of Islam and compare that with the prevailing banking system. During early days of Islam, there was

a) No well established financial or banking System in place to deal with personal or business loan transactions.

b) Moneylender used to give money or other commodities to the borrowers at their individual set rate and there was no regulatory body to regulate the terms and re-payment schedules.

c) People used to borrow money and return double or more than the actual amount. The rate of return was entirely on the discretion of the moneylender to decide and impose. No regulatory body was in existence to mediate and resolve unjustifiable return and gain for the lender. This was too much for the poor people and their life was often ruined because of this trend. Once stranded in this web of moneylender, the borrower used to find any way of escape and consequently use to loose every thing in hand.

d) Most of the borrowing items used to be gold, silver, wheat, barley or livestock etc.

Before one can conclude whether riba is equal to interest or not, one would like to know riba, its meaning and its comparison with Interest.

Riba in light of Quranic Verses

Quran verses relevant to riba and its practice indicate that riba (usury) is prohibited for Muslims but they were encouraged to do trade.

Quranic Verses on this subject.

1. (Al-Rum, 30:39) . And whatever you lay out as usury, so that it may increase in the property of men, it shall not increase with Allah; and whatever you give in charity, desiring Allah's pleasure-- it is these (persons) that shall get manifold.

2. (Al-Nisa’, 4:161): And their taking usury though indeed they were forbidden it and their devouring the property of people falsely, and We have prepared for the unbelievers from among them a painful chastisement.

3. (Al-‘Imran, 3:130-2):. O you who believe! do not consume usury, making it double and quadruple and be careful of (your duty to) Allah, that you may be successful.

4. (Al-Baqarah, 2:275): Those who swallow down usury cannot arise except as one whom Shaitan has prostrated by (his) touch does rise. That is because they say, trading is only like usury; and Allah has allowed trading and forbidden usury. To whomsoever then the admonition has come from his Lord, then he desists, he shall have what has already passed, and his affair is in the hands of Allah; and whoever returns (to it)-- these arc the inmates of the fire; they shall abide in it.

5. 2:275 Allah has permitted trade and has forbidden interest

The Meaning of Riba

Riba means increase, addition, expansion or growth. In Shari‘ah, riba technically refers to the "premium" that must be paid by the borrower to the lender along with the principle amount as a condition for the loan.

Islamic Sharia has divided ‘riba’, into tow categories.

1. Riba al-nasi’ah.

2. Riba al-fadl (some call it as interest in excess)

Riba Al-Nasi’ah

The term nasi’ah means to postpone, defer, or wait, and refers to the time that is allowed to the borrower to repay the loan in return for the ‘addition’ or the ‘premium’.

The prohibition of riba al-nasi’ah essentially implies that the fixing in advance of a positive rate of return on a loan as a reward for waiting is not permitted by the Shari‘ah. Hence Muslim clergy is saying that interest on loan borrowed for personal or business use is not allowed due to fixed and predetermined rate whereas if the loan is based on loss or profit then it is allowed-Islamic Banking.

Riba Al-Fadl

Riba al-fadl: spot exchange of dissimilar commodities. (injustice and exploitation is occurred). It relates to exploitation in trading.

Quranic verse allow trade provided it is done with fairness and no injustice or exploitation occur during the deal. Trade is allowed with fair knowledge of the prevailing prices and the quality of goods being purchased or sold on the part of both the buyer and the seller. If not, it would be regarded as Riba al-Fadl.

Prophetic Hadith.

Mohammad said in his farewell sermon: “God has forbidden you to take Riba, therefore all riba obligation shall henceforth be waived. Your capital, however, is yours to keep. You will neither inflict nor suffer inequity. God has judged that there shall be no riba and that all the riba due to `Abbas ibn `And al Muttalib shall henceforth be waived.”

Quran explicitly prohibits Riba, and since Quran is an undisputed source of guidance, all Muslims unanimously agree on prohibition of Riba. There is no difference of opinion among any school of thought on prohibition of Riba in Islamic Shariah

One can see that Quran strongly condemns the institution of riba (unjustified growth), but neither Quran nor hadiths are explicitly clear on this subject and what we have to follow is the interpretation by scholars in terms of Riba al-nasiah and riba al-Fadl. These categories are not well defined and are cause of misunderstanding. Early jurists of Islam, seem to be confused on Riba al-nasiah and riba al-Fadl. Some have mentioned that riba al-nasiah or usury is allowed while the other mentioned that it is forbidden. Contrary to this some have mentioned that al-Fadl is prohibited. Both riba al-nasiah and riba al-Fadl will be mentioned latter on but before that let us see and inform our selves what Quarn says about this subject.

Apparently Riba al-Fadl is very confusing and misunderstood aspect of riba. It is allowed in Islam provided the trade on spot is done with fairness and both lender & loaner exchange the same amount/commodity- this does not make sense. Why people would like to exchange commodities of same characteristics on spot. This is not practical and no one would like to do so. Some people think that Riba al-fadl was prohibited not for its own sake but because, if allowed, it lead to the real Riab al-Nasiah.

Conclusion

Current Banking interest is

· Far from destruction and ruinous compared to un-regulatory riba/usury.

· Interest rates are fixed by market fluctuation to increase or decrease liquidity in case of inflation or deflation.

· A bank cannot be conceived as an exploiting institution.

· Bank is a regulatory institution facilitating financial operations between borrowers and lenders.

· The borrower has an option of escape through alternate avenues available.

Those jurists who argue that interest is not permissible as there is no element of risk in it and its rate is fixed. There is no such argument in the Quran itself. If this argument is valid then even investing in a building and giving premises on rent will also be not permissible as rent is fixed and there is no risk involved.

The Quran denounces riba as an exploitative practice leading to unjust growth, not because there is no element of risk in it.

In view of the above arguments it can be said comfortably

· Banking interest cannot be treated as riba

· Banking interest should be permissible as per decree of Nov. 2002 issued by Al-Azhar University of Egypt as well as comparative studies of many scholars who agree that current banking interest is not equal to riba/usury.

I hope these may shed some light on the questions of riba/usury vs. interest. It is entirely up to Muslims to consider what path they want to follow. If they think rationally and concur with my understanding of the subject, they may continue to follow the current banking system.

However those who oppose this perception may either have to change the society to comply with the concept of riba in our day to day financial transaction. The chances of bringing Islamization through out the world, seems to be a wishful thinking under current circumstances. In absence of that, we may be following a stereo type of life, partially living in sin and proclaiming to be follower of the faith.


M. Ashraf

Winnipeg, MB Canada





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