Riba (Arabic: ربا‎ ribÄ, IPA: [ˈrɪbæË]) can be roughly translated as "Usury", or unjust, exploitive gains made in trade or business. Riba is mentioned and condemned in several different verses in the Qur'an (Quran 4:161, Quran 3:130, Quran 4:161, Quran 30:39 and perhaps most commonly in Quran 2:275-280 "They say: 'buying and selling is but a kind of usury' - while God has made buying and selling lawful and usury unlawful"). It is also mentioned in many hadith, and considered a major sin in Islamic economic jurisprudence (fiqh).
While Muslims agree that Riba is prohibited, there is disagreement over what it is.
Most Islamic jurists describe two kinds of Riba:
- Riba an-nasiya: Riba or excess charged for a loans in cash or kind.
But not all Muslims equate the term "Riba" with interest, as the Qur'an actually described "Riba" as a general term, that is not only limited to as a financial term.
Etymology and definitions
The word was linguistically used by the Arabs prior to Islam to refer to an increase. The definition of riba in classical Islamic jurisprudence was "surplus value without counterpart."
When currencies of base metal were first introduced in the Islamic world, paying a debt in a higher number of units of this fiat money was not considered riba; jurists were concerned with the real value of money (determined by weight only) rather than its numerical value. For example, because all makes of coins did not carry exactly similar weight it was acceptable for a loan of 1000 gold dinars to be paid back as 1050 dinars provided the dinar were of equal aggregate weight of gold, therefore having the same real value.
Definitions of Riba include:
- unjustified increment in borrowing or lending money, paid in kind or in money above the amount of loan, as a condition imposed by the lender or voluntarily by the borrower. Riba defined in this way is called in Fiqh riba al-duyun (debt usury).
- an increase in a particular item. The word is derived from a root meaning increase or growth.
- non-equality in an exchange. This can be different results from the exchange of nonequivalent quantities or from the presence of a risk in which the other contractual party does not share.
- not any bank interest, but interest charged where the economically strong/rich exploit the economically poor and/or vulnerable.
Most Islamic jurists (Fuqaha) describe two kinds of Riba:
- Riba an-nasiya: Riba on Credit Transaction, when two items of same kinds are exchanged but one or both parties delays delivery or payment and pays interest, (i.e. excess monetary compensation in the form of a predetermined percentage amount or percentage).
- Riba al-Fadl: the simultaneous exchange of unequal quantities or qualities of a given commodity.
History
Riba is an Arabic word meaning usury, addition or growth. It is related to the word "Rabbi", which means "Lord". Riba was forbidden in the Medinan society of Muhammad, just as in the medieval Christian world. Historically, the consensus of Muslim jurists held that any loan that involved an increase in repayments was forbidden, and as such, the Islamic state prohibited it. This prohibition was reconsidered with the advent of European influence(crusades/colonization?) during the Age of "Enlightenment".
The word is a Quranic term. One of its applications is "usury". The Quranic term is not limited to money but as well includes all transactions in which the debtor returns a sum of goods in excess or above the original agreed transaction, be it money, commodity, any other item or goods or services; anything in excess of original agreed agreement is considered riba if items exchanged are of the same kind (such as gold for gold).
Riba is considered amongst the Seven heinous sins (Al-Saba al-Mubiqat - السَبعَ الموبÙقاتÙ), namely:
- Believing in gods other than God.
- Magic.
- Murder.
- Riba/usury.
- Unlawfully taking orphans' money.
- Fleeing the battlefield.
- Accusing chaste, pious women.
The Qur'an states:
يَا Ø£ÙŽÙŠÙÙ'هَا الَÙ'Ø°Ùينَ آمَنÙواÙ' لاَ تَأÙ'ÙƒÙÙ„ÙواÙ' الرÙÙ'بَا أَضÙ'عَاÙًا Ù…ÙÙ'ضَاعَÙَةً وَاتَÙ'Ù‚ÙواÙ' اللÙ'Ù‡ÙŽ لَعَلَÙ'ÙƒÙÙ…Ù' تÙÙÙ'Ù„ÙØÙونَ
3:130 O you who have believed, do not consume usury, doubled and multiplied, but fear God that you may be successful.
ذَٰلÙÙƒÙŽ بÙØ£ÙŽÙ†ÙŽÙ'Ù‡ÙÙ…Ù' قَالÙوا Ø¥ÙÙ†ÙŽÙ'مَا الÙ'بَيÙ'ع٠مÙØ«Ù'ل٠الرÙÙ'بَا Û— ÙˆÙŽØ£ÙŽØÙŽÙ„ÙŽÙ' اللَÙ'ه٠الÙ'بَيÙ'عَ ÙˆÙŽØَرَÙ'Ù…ÙŽ الرÙÙ'بَا
They say: 'buying and selling is but a kind of usury' - while God has made buying and selling lawful and usury unlawful.[Quran 2:275]
Muhammad 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 `Abd al Muttalib shall henceforth be waived.".
The Qur'an explicitly prohibits riba, and since the Qur'an is an undisputed source of guidance for Muslims, all Muslim authorities unanimously agree on prohibition of riba. There is no difference of opinion between any school of thought on the prohibition of riba in Islamic shariah.
The Qur'an mentions that the person who deals with riba (ربا) will stand (on judgement day) as one who is beaten by Satan into insanity. Here, Qur'an makes it clear that "trade" and "riba" are not the same and that God forbade "riba" and allowed "trade". It further states that whoever accepts the guidance of God must immediately stop dealing in riba, and those who return to riba after God's guidance has reached are dwellers in fire because God destroys "riba" and will reward those who give to charity.
Muhammad cursed the one who deals with riba. From Jabir: Muhammad cursed the receiver and the payer of riba, the one who records it and the two witnesses to the transaction and said: "They are all alike [in guilt]." [Sahih al-Muslim, Sahih Al-Bukhari, Tirmidhi, Ibn Majah, Bahiqi and Musnad Ahmad]
Islamic shariah considers riba as a tool of oppression and a means to unjustly take the money of others by exploiting their needs and circumstances. Hence, it forbids a riba-based system altogether and promotes charity as an alternative. Therefore, Muhammad said: "God has judged that there shall be no riba" [Last Sermon]
The crimes of dealing in riba are so serious that God has declared war against those who deal in it. Muhammad has cursed anyone who deals with riba, the one who takes it, the one who pays it and the one who records it, as their sins are considered equal under the Quran.
Muhammad declared the practice of riba worse than zina, worse than "to a man committing zina with his own mother".
Prohibition of riba
The Qur'an deals with riba in 12 verses, the word appearing eight times in total, three times in 2:275, and once in 2:276, 2:278, 3:130, 4:161 and 30:39.
The Mekkan verse in Surah al-Rum was the first to be revealed on the topic: 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)
The other Medinan verses: And because of their charging Riba while they were prohibited from it (Quran 4:161) Those who believe do not eat up Riba doubled and redoubled (Quran 3:129-130)
Culminating with the verses in Surah Baqarah: Those who benefit from interest shall be raised like those who have been driven to madness by the touch of the Devil; this is because they say: "Trade is like interest" while God has permitted trade and forbidden interest…God deprives interest of all blessings but blesses charity.... O believers, fear God, and give up the interest that remains outstanding if you are believers. If you do not do so, then be sure of being at war with God and His messenger. But, if you repent, you can have your principal.... (Quran 2:275-280)
Jurists do not consider the first two verses as clear prohibitive verses on the matter, whereas the latter two have been understood to prohibit Muslims from riba.
Tabari quotes a number of Tabi'een, who state the verse from Surah al-Rum refers to a gift whereas al-Jawzi quotes Hasan al-Basri as stating it refers to riba. Either way, there is insufficient indication from this verse that riba is prohibited, if it does indeed refer to riba.
The second verse refers to the Jews and their taking of riba, which leaves it unclear if such a prohibition applies to the Muslims.
The next verse is seen by many as prohibiting riba, including Ibn Hajar al-Asqalani. However it appears that recourse to some traditions relating to Amr ibn Aqyash are required for the prohibition as the verse itself could be interpreted as expressing a preference against interest.
The verses from Surah Baqarah are seen as categorically forbidding riba. The backdrop to these verses was the dispute between Banu Thaqif and Banu Amr ibn al-Mughirah over riba due on loans between them. As such, the jurists historically agreed on the prohibition of riba from these verses and termed it riba al-nasia, distinguishing it from the interest in exchanging like goods in different quantities, mentioned in a number of narrations, riba al-fadl.
As such, some jurists saw riba forbidden early in Mecca, some in the year 2 AH and some after the opening of Mecca, but the majority agreed on its prohibition.
Some of the modern jurists, like Abduh, Rashid Rida, Shaltut, Sir Syed Ahmed, Fazl al-Rahman, Tantawi and Qardawi have tried to legitimize bank interest. The earlier ones legitimized it for awqaf and state that investment schemes during the late period of the Ottoman rule. They were the first to introduce the notion that riba al-nasia was permitted. Those who followed them remained minority voices whilst the vast majority of modern jurists prohibit it also.
They also advanced non-legal rational arguments such as the necessity of modern finance, necessary for efficient allocation of resources, commercial interest not being the riba prohibited in Islam, no violation of justice or exploitation these days and interest rates are not very high, to name but a few. Most of these arguments have been criticized by modern writers, including Siddiqi, Zarqa, Khan & Mirakhor and Chapra, a good case in point being the published Supreme Court of Pakistan Judgement on the matter.
Rationale
As an exchangeable term with riba, interest is defined by Ismail Ozsoy, professor of economics in Fatih University, Istanbul, as "an unearned or unequally distributed income." Riba or interest is unearned when the realized income that is earned out of the loan is less than the interest rate, and it is unequally distributed income when the realized income is higher than planned.
Ozsoy argues that the main characteristic of interest is that either the borrower or the lender would absolutely and inevitably be subjected to a loss and an injustice in any case, for its rate is fixed at the very beginning, but it is impossible to predict the outcome of the business at which the loan is used, profit or loss, or how much either would be. Thus, it can be identified with an absolute injustice for either side of the transaction. It does not matter whether the interest rate is high or low and whether it is called interest or usury because the different kinds of interest or different rates change only the address, or the direction, of the injustice; it is sometimes the payer and sometimes the receiver of interest who is exposed to this injustice and/or financial loss.
Ozsoy bases his argument about the unfairness of interest on the Quranic verses: "O you who believe! fear God and give up what remains of your demand for interest, if you are indeed believers. If you do it not, take notice of war from God and His Messenger: but if you repent you shall have your capital sums; deal not unjustly and ye shall not be dealt with unjustly" (Baqara, 2:278-279).
Ozsoy argues that injustice and unequal distribution of income is an indispensable nature of interest as well as usury, which is considered to be an excessive rate of interest. As a matter of fact, while any high rate of interest may expose the borrower to a financial loss in hard economic conditions, any low rate may expose the lender to a loss in favourable economic conditions where return on capital is high. This case reveals that there is not any acceptable rate of interest, low or high, from the standpoint of the equitable distribution of income. That characteristic of interest arises from the fact that its rate is predetermined despite the impossibility for mankind of predicting whether or not a profit will be made, and even if, how much it will be.
Ozsoy compares the interest mechanism to a two-bladed saw, or a knife, that cuts on both sides, such that either the borrower or the lender must pay more than they receivedâ€"one or the other side is unavoidably injured by the interest mechanism.
Interest is the income earned by the borrowed financial capital regardless it is in the production process or not. Interest is the allocation, to the capital owner, of an unearned, undeserved, unborn, unavailable and imaginary income that might be attained without producing anything and without contributing any value to the revenue of the society. It imposes all the risks on the debtor directly and on the society indirectly but not on the lender although it is directly related to him/her.
Interest mechanism prevents the fair distribution of positive or negative outcomes of economic activities among the lender and borrower and worsens the income distribution. This occurs either by providing the capital owner a certain and fixed percentage of earning in any case regardless of the negative outcome of the business, or by limiting his earning with only a predetermined amount of return in case the borrower entrepreneur earns considerably high income out of his/her financial capital.
The main reason advocated by Siddiqi and Ganameh as to the rationale of prohibition is that it is oppression involving exploitation. In matters of consumption loans, it is necessary that those who have wealth should assist those without, and in productive loans, a guaranteed return on capital is unjust given the uncertainty surrounding entrepreneurial profits, whereas a return to both parties as a rate of profit would be more equitable.
Taji al-Din argues the reason appears to be the restriction in circulation of wealth among those who already have it. Lenders would not provide loans to those they believe are unable to repay so such wealth would be restricted to those able to service the debt. This is something forbidden categorically by the Quran and the effects on society result in the accumulation of wealth amongst those who have it and increase the divide between the rich and poor.
Mawdudi believes the cause relates to the undesirable resulting effect of an imbalance between production and consumption. This is caused by the transfer of purchasing power from those with a high propensity to consume to those with a low propensity to consume. The latter group reinvests its income in production, increasing production and decreasing consumption demand. The cost of capital results in increased prices of consumption goods, accentuating this process. Mawdudi believes that this is the source of evils in the economy such as stagnation, depression, monopoly and ultimately imperialism. Interest-free loans and the prohibition of return on capital along with zakat, wages, profit and profit-share recreates this balance. The focus shifts to the entrepreneur whose activity becomes the only source of income along with wages, giving him the upper hand in society. Siddiqi and Ganameh cite the hadith of "income devolved on liability" in this context.
Some argue that interest allows the creation of a group of people who contribute nothing to society, simply generating income from capital. This starves society of their contribution and the rationale of prohibition is to reverse this.
Ibn Rushd argued the rationale relates to the possibilities of cheating that exists in riba, which is clearly visible in riba fadl. Other arguments that some writers try to extract from indications on the divine texts include the rationale being corruption, unjust acquisition of property rights, destruction, and a detrimental personality.
Hameedullah believes the reason is the unilateral nature of the risk born in these agreements. The Islamic principle is for a reward, there must be some liability incurred; otherwise, a return is prohibited.
References to riba in the Qur'an and Sunnah
Qur'an
The Qur'an states the following on riba:
Hadith
Riba is mentioned in a number of hadith:
Additional hadith exist regarding usury.
Relevance to modern times
Siddiqi suggests the key to whether the idea of prohibition of riba is effective is whether it can produce stability and efficiency in the economy and if it is conducive to growth and development and increase justice and fairness.
The model of profit-sharing on the liability side of the banking system would make the financial system more stable than using riba. The sharing arrangements between suppliers and users of resources for producing wealth improves business cycles and stability in the economy.
Entrepreneurship
With the abolition of interest, Siddiqi argues that the economic focus becomes attached to entrepreneurial activities, using the vehicle of mudarabah, resulting increasing economic activity. Although it may be thought that without interest, incentive to save drops, Keynesian analysis indicates that savings are a function of income and interest is minor. As such, if income can be increased, savings should increase, even in the absence of interest.
Mannan argues that interest holds back investment in production, whereas Mawdudi points out that projects that could be socially useful, generating a small return and prevented as interest rates prevent capital being utilized on such projects.
Without interest, capital can be more efficiently allocated to productive projects based on the rates of profit rather than more credit-worthy individuals. A system based on profit-sharing also harmonizes the interests between investors and entrepreneurs increasing efficiency.
Trade cycles
Many writers see the destabilizing effects that interest has on trade cycles. The basic idea is that different interest rates and their variations allow for speculative institutions. Speculators hoard capital for the purpose of chasing higher rates, which in turn deprives the deployment of capital for productive purposes. It is argued that these vast movements of funds contribute to the fluctuations in the trade cycles and make economic planning and organization problematic.
With the absence of interest, writers argued there will be less speculation due to the absence of the interest rate and the reduced levels of debt that will result. That is not to say there will be no debt: non-interest modes of finance allows debt but less. Decreased levels of speculation would thus result in a more stable environment.
Financial intermediation
Writers like Fazl al-Rahman say that the interest rate is like price in the modern economy. It is used to regulate the demand of finance, and if the interest rate is taken to zero, the world will be faced with limited supply and infinite demand. How would credit be allocated?
The main answer to this question is that he believes that finance, for productive projects, can be provided through profit-share, cost-plus basis, or leasing.
Writers like Siddiqi suggest a two-tier mudarabah model as the basis of a riba-free banking system. This involves the bank acting as the capital partner in a back-to-back mudarabah contract with the depositor on one side and the entrepreneur on the other side. This model can be supplemented by a number of fixed-return models (like Ijara, Istisna, Murabaha etc.). In practice the murabaha model is the bank's favourite, as it bears results most similar to the interest-based finance models.
However, it has been criticised as not following the possession by bank/seller requirements and risks taken by the financier are non-existent (being insured or guarantees provided by the customer). Additionally, Khattab has criticised the whole two-tier mudarabah system as having no basis in Islamic law, as there are no instances where the mudharib passed funds onto another mudharib, and as such is questionable.
Banks have demand deposits in the nature of loans to the bank and investment deposits. Some offer guaranteed savings accounts with permission to use the funds and a discretionary reward to the depositor as in the case of the Bank Islam Malaysia Berhad. Initially, demand deposit accounts were more common, but over time, most accounts are now investment accounts, which reflects the confidence of depositors in the ability of banks to generate a return. Islamic banking operations are successfully operating in many Muslim countries, including Pakistan, Bangladesh, Malaysia, Iran, Sudan, Turkey and Bahrain.
Insurance operations, starting in Sudan in 1977, have now been successfully implemented in a number of countries from Malaysia to Jordan. The takaful mudarabah model is used, compensating premium-paying subscribers in case they incur losses or damages without any interest-based activities.
International finance
Countries are crippled with servicing both non governmental and foreign debt. Often, loans readily lend to governments regardless of the project as they know that there is NO guaranteed return on capital is available. This results in projects with low or no Return on investment receiving funding, with the lenders taking no responsibility or involvement in the project or the debtors as long as continuous payments are made, even if the debts are never settled. The resulting debt, which benefits neither the taxpayers who provided the capital or the government that received it, leads to limited spending on developing their infrastructure and human capital as large amounts of future revenue are spent on debt servicing.
Accounting concept of interest
Some writers argue for an accounting concept of interest to evaluate projects and investments. As a tool for comparing projects with countries where the interest rate is operated, however, it is argued that it is hard to see why a profit rate cannot be used.
Others argue the need of a bank rate for monetary policy. Siddiqi suggests two variables that can alternatively be used: mark-up in sales with deferred payment and ratios used in sharing modes of finance. These ratios can be used to manipulate the rates of profit. They can be determined through market forces or set by governments in public interest, as is legislated in Sudan and Pakistan.
Alternatives
In its campaign against Riba in the 1980s the regime of General Muhammad Zia ul-Haq replacing interest-bearing savings accounts with PLS (profit-loss sharing) instruments in Pakistan's state banks. The government also introduced and encouraged such banks to adopt financing schemes based upon the principles of mudaraba and or musharaka.
- Murabaha is a practice in which the "lender" (usually a bank) purchases, in its own name, goods that the borrower (usually an importer or trader) wants, and then sells the goods to him at an agreed mark-up. This mark-up is interest by a different name, and serves as a semantic work-around. The technique is used for financing trade, but because the bank takes title to the goods, and is therefore engaged in buying and selling, its profit derives from a real service and entails a degree, albeit minimal, of risk.
- Musharaka is a practice in which the "lender" (usually a bank) enters into a partnership with the borrower/client in which both share the equity capitalâ€"and perhaps even managementâ€"of a project or deal, and both share in the profits or losses according to their equity shareholding.
Substitute for riba
Economic modeling in an Islamic context looks to find alternative variables and parameters. For instance, many of the key models in modern economic theory have interest (riba) as a key element. According to one author, Tobin's q could replace Interest (I).
See also
- Cleansing of the Temple
- Islamic bank
- Loans and interest in Judaism
- Shariah investments
- Usury
- Vix pervenit
- Zakat
Notes
References
- Badr, Gamal M. (Spring 1989). "To the Editor". The American Journal of Comparative Law (American Society of Comparative Law) 37 (2): 424â€"425. doi:10.2307/840180. JSTOR 840180.Â
External links
- Stipulation of Excess in Understanding and Misunderstanding Riba: The Al-Jassas Link by Dr. Mohammad Omar Farooq
- RIBA IN ISLAM - A refreshing Look
- Toward Defining and Understanding Riba by Dr. Mohammad Omar Farooq
- Exclusive on the subject of Riba (ar-Riba, usury, interest), answering Why Riba was prohibited? and The definition of Riba.
- Riba, Interest and Six Hadiths: Do We Have a Definition or a Conundrum? by Dr. Mohammad Omar Farooq
- The Riba-Interest Equation and Islam: Reexamination of the Traditional Arguments by Dr. Mohammad Omar Farooq
- Why does Islam prohibit interest (Riba)?
- Riba and Interest: Definitions and Implications.
- Meaning of Riba and Usury in Islam
- Interest vs Risk-Sharing in Business Partnerships
- The Prohibition of Riba in the Quran and Sunnah by Imran N. Hosein
