Riba

For other uses, see Riba (disambiguation).

Riba (Template:Lang-ar ribā or al-ribā, IPA: [ˈrɪbæː]) can be roughly translated as "Usury", or unjust, exploitative gains made in trade or business under Islamic law. Riba is mentioned and condemned in several different verses in the Qur'an (3:130, 4:161, 30:39 and perhaps most commonly in 2:275-2:280). It is also mentioned in many ahadith.

While Muslims agree that riba is prohibited, there is disagreement over what it is. It is often used as an Islamic term for interest charged on loans, and this belief—that there is a consensus among Muslims that interest is riba—is the basis of a $2 trillion Islamic banking industry. However, not all scholars equated riba with all forms of interest, and among those who do there is also disagreement over whether it is a major sin and against sharia (Islamic law), or simply discouraged (makruh).

In addition to the unjust gains made from repayment of a loan—the full name of which is riba an-nasiya—most Islamic jurists believe there is another type of riba, riba al-fadl: the simultaneous exchange of unequal quantities or qualities of a given commodity.

Etymology and definitions

The word was used by the Arabs prior to Islam to refer to an increase. In classical Islamic jurisprudence the definition of riba was "surplus value without counterpart."

The difficulty of explaining what exactly riba means in Islam has been noted by early Islamic jurists such as Ibn Majah and Ibn Kathir, who quote the second "Rashidun Caliph" Umar bin al-Khattab,

"There are three things. If God's Messenger had explained them clearly, it would have been dearer to me than the world and what it contains: (These are) kalalah, riba, and khilafah."

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). (Abdel-Rahman Yousri Ahmad)
• An increase in a particular item. The word is derived from a root meaning increase or growth. (Saalih al-Munajjid, IslamQA website)
• Non-equality in an exchange. This can be different results from the exchange of nonequivalent quantities (Riba al-fadl) or from the presence of a risk in which the other contractual party does not share. (Olivier Roy)
• All forms of interest, "any excess on the principal sum of loan", i.e. any and all interest, irrespective of "form, context, or magnitude", purpose or duration. ("orthodox" or "conservative" view of classical jurists and revivalists as described by Encyclopedia of Islam and the Muslim World and other sources.) (Some translations of verses of the Quran substitute the word interest for riba or usury.)

At least two sources emphasize a dichotomy in definitions—an inclusive and strict one used by classical scholars, and a narrower, more easily evaded one used in practice, or at least in modern practice:

• Interest or usurious interest. Historically Islamic legal scholars have interpreted the Quran as "prohibiting any loan contract that specifies a fixed return to the lender" on the grounds that it provides "unearned profit to the lender" and imposes "an unfair obligation on the borrower." In the modern era Islamists and revivalists" preach that all interest is socially unjust and should be banned, while most Muslim countries allow moderate interest rates—some banning compound interest; (John Esposito)
• Interest, or profit from the loan of money or goods, which is prohibited in any degree in Islam but hardly observed in any Islamic country, where instead it is either disregarded (considered permissible provided it is not excessive (Egypt)), or "referred to by some such euphemism as `commission`" (Cyril Glasse), and/or evaded by legal subterfuges (known as ḥiyal) where, for example, a money lender buys something and later sell it back for a greater amount. (Ludwig Adamec).

Another alternative to the strict definition of classical scholars and revivalists was put forth by Islamic modernists who emphasized the moral aspect of any prohibition, believing that what should be prohibited was the exploitation of the needy, rather than the interest itself:

• Interest on some loans -- "exploitive" loans—but not others. Possible meanings of exploitive riba include:
  • interest on loans for consumption not investment, since investment loans were allegedly not practiced in Meccan society and usually earn borrowers a return to pay the interest charged (this idea was proposed in the 1930s by Syrian scholar Marouf al-Daoualibi);
  • interest on loans charging compound rather than simple interest, (an interpretation proposed in the 1940s by Egyptian jurist al-Sanhuri);
  • charging "exorbitant" interest rates;
  • interest on loans to the poor and needy;
  • interest on loans by the economically strong/rich to the economically poor and/or vulnerable (as opposed to interest paid by large banks to individual account holders);
  • interest on loans motivated by a desire to make risk-free return of principal along with some interest or additional return, and where no concern is given to whether the funds are invested to enhance the earning ability of the lender (Muhammad Akram Khan).

Most Islamic jurists (Fuqaha) describe several different kinds of riba:

• Riba an-jahiliya: usury practiced in pre-Islamic Arabia referred to in Quran 3:130. Scholars differ on its definition. According to Raqiub Zaman and M.O.Farooq, a riba an-jahiliya debt was "doubled and redoubled" each year if the borrower could not pay what was owed. Another definition followed by some misguided people (according to Taqi Usmani), is that riba an-jahiliya was a kind of loan where the agreement did not call payment above the principal by the lender, but if they could not pay back when the debt was due they were given more time if they paid an additional amount (not necessarily double or triple the principal). Usmani states that in reality a number of transactions where "an increased amount was charged on the principal amount of a debt" were in vogue at that time and can be considered riba an-jahiliya. Other orthodox scholars agree and state riba an-jahiliya, riba an-nasiya, riba al-duyun, riba al-Quran, riba al-qardh are all names for one of two types of riba, the other type being riba al-fadl.
• Riba an-nasiya: the excess accruing from a loan transaction. It is riba on a 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). (Taqi Usmani quotes Fakhruddin Al-Raazi as saying "riba an-nasiah, it was a transaction well-known and recognized in the days of Jahiliyya".)
• Riba al-fadl, also riba al-sunna: excess accruing in a sale or barter transaction, i.e. riba involving the simultaneous exchange of unequal quantities or qualities of a given commodity. Riba al-fadl and its prohibition—according to Usmani—was developed by Muhammad (hense the name riba al-sunna), and so was not part of pre-Islamic jahiliya.

History

Riba an-jahiliya

John Esposito describes riba as a pre-Islamic practice in Arabia "that doubled a debt if the borrower defaulted and redoubled it if the borrower defaulted again". It was held responsible for enslaving some destitute Arab borrowers.

Abdullah Saeed quotes the son of Zayd b. Aslam (d.136/754) on what the Quran 3:129-130 means by riba being "doubled and redoubled":

"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; one hundred in one year would become two hundred. If that was not paid, the debt would increase to four hundred. Each year the debt would be doubled."

(In describing "riba in the days of Jahiliyya", Taqi Usmani makes no mention of doubling the debt but states that "it had different forms", but "the common feature of all these transactions is that an increased amount was charged on the principal amount of a debt.")

Riba

According to orthodox sources (Youssouf Fofanaa, Taqi Usmani), "some jurists" saw riba (which Fofanaa defines as interest) "forbidden early in Mecca, some in the year 2 AH and some after the opening of Mecca, but the majority agreed on its prohibition". Usmani cites sources declaring that 3:129 "clearly" forbade riba, i.e. interest and these verses were revealed in 2 AH.

Other sources, such as the Encyclopedia of Islam and the Muslim World, state that early Muslims disagreed on whether all or only exorbitant rates of interest could be considered riba, and thus declared forbidden, but the broader definition won out with a consensus of Muslim jurists holding that any loan that involved an increase in repayments was forbidden. One particular jurist (al-Jassas, d.981, who is criticized by Modernists) is credited with establishing the orthodox definition of riba -- "stipulat[ing] excess [payment] in a loan or debt", (i.e. interest on debt).

Some (scholar Timur Kuran) attribute the basis of religious condemnation of interest on loans to the widespread practice in the ancient world of selling loan defaulters into slavery and often shipping them to foreign lands. Among other monotheist Abrahamic religions, Christian theologians condemned interest as an "instrument of avarice", the Jewish Torah prohibited lending at interest to fellow Jews but allowed lending at interest to non-Jews (i.e. Gentiles) (Deut. 23:20). (Historically many Jews were led to money lending with interest as a profession because of this exemption and because they were barred from many professions in Christian territories.)

(According to another source—International Business Publications—the "common view of riba among classical jurists" of Islamic law and economics during the "Islamic Golden Age" was that interest charges on loans of gold and silver currencies were unlawful, but applying "interest to fiat money -- currencies made up of other materials such as paper or base metals -- to an extent" was not riba. Thus, when "currencies of base metal were first introduced in the Islamic world", Islamic jurists did not forbid interest charges on them as riba.)

Historically, while the Islamic states followed classical jurisprudence in prohibiting an increase in repayments on loans (interest) in theory, the giving and taking of interest continued in Muslim society "at times through the use of legal ruses (hiyal), often more or less openly." One common Ottoman era stratagem to circumvent of the ban on interest, according to Timur Kuran, was known as istiglal and involved the borrower selling his house to a lender and immediately leasing it back. The proceeds of the sale served as the sum loaned, the lease/rent/mortgage payment served as principle and interest repayment of the loan. According to Kuran, only transactions "that satisfied the letter of the ban" on interest "through stratagems" (hiyal) were allowed. In addition, in the sixteenth century, an Ottoman sultan "limited the annual rate of interest to 11.5%" "throughout the empire" on these loans. This order "was duly ratified by a legal opinion (fetva)."

According to Minna Rozen the business of money lending was completely in the hands of Jewish Sarrafs in the Ottoman Empire. Europeans who visited Ottoman Empire stated that Ottoman economy would not function without these Sarrafs, though they sometimes were accused of cheating. In Persia, money lending was also dominated by Jewish Sarrafs. In nineteenth century Shiraz, for example, almost all Jews were active in lending money on interest.

Modernists

The orthodox prohibition on interest was reconsidered by Islamic Modernists starting in the late 19th century in reaction to the rise of European power and influence during the Ages of "Enlightenment", "Discovery" and colonialism. According to author Gilles Kepel, for many years in the 20th century, the fact that interest rates and insurance were among the "preconditions for productive investment" in a functioning modern economy led many Islamic jurists to "rack their brains" to "find ways of" justifying the use of interest "without appearing to bend the rules laid down" in the Quran.

Revivalists

In the late 20th century (mid-1970s) however, Islamic revivalists/activists/Islamists have worked to revive and rejuvenate the definition of interest as riba, to enjoin Muslims to lend and borrow at "Islamic Banks" that avoided fixed rates, and to mobilize to pressure governments to ban the charging of interest. In 1976, King Abdulaziz University in Jeddah organized the First International Conference on Islamic Economics in Makkah. At the conference, "several hundred Muslim intellectuals, Shari'ah scholars and economists unequivocally declared ... that all forms of interest [were] riba". By 2009, over 300 banks and 250 mutual funds around the world complied with this definition of riba and disavowed interest on loans or deposits, and by 2014 around $2 trillion in assets were "sharia-compliant".

Scripture on riba

Both the Quran and the ahadith of Muhammad mention riba. Orthodox scholars such as Mohammad Nejatullah Siddiqi and Taqi Usmani define Quranic verses (2:275-280) to mean that riba is any payment "over and above the principal" of a loan. On the other hand, according to non-orthodox economist Mohammad Omar Farooq, "it is broadly agreed that the Qur'an does not define riba". Farhad Nomani and Abdulkader Thomas emphasize the importance of ahadith. Still another (minority) viewpoint is that of Fazlur Rahman Malik, who says that "no attempt" to define riba using ahadith has been "successful" so far.

Quran and prohibition

Twelve verses in the Qur'an deal with riba. 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 Ar-Rum was the first to be revealed on the topic:

And what you give in usury, that it may increase upon the people's wealth, increases not with God; (Quran 30:39)

Other Medinan verses are:

... for their taking usury, that they were prohibited, ... (Surah An-Nisaa Quran 4:161)

O believers, devour not usury, doubled and redoubled, and fear you God; haply so you will prosper. (Surah Al-i-'Imran Quran 3:129-130)

Culminating with the verses in Surah Baqarah:

Those who devour usury shall not rise again except as he rises, whom Satan of the touch prostrates; that is because they say, 'Trafficking (trade) is like usury.' God has permitted trafficking, and forbidden usury. Whosoever receives an admonition from his Lord and gives over, he shall have his past gains, and his affair is committed to God; but whosoever reverts -- those are the inhabitants of the Fire, therein dwelling forever.

God blots out usury, but freewill offerings He augments with interest. God loves not any guilty ingrate.

Those who believe and do deeds of righteousness, and perform the prayer, and pay the alms - their wage awaits them with their Lord, and no fear shall be on them, neither shall they sorrow.

O believers, fear you God; and give up the usury that is outstanding, if you are believers.

But if you do not, then take notice that God shall war with you, and His Messenger; yet if you repent, you shall have your principal, unwronging and unwronged.

And if any man should be in difficulties, let him have respite till things are easier; but that you should give freewill offerings is better for you, did you but know. (Quran 2:275-280)

Interpretations

According to Youssouf Fofana and Taqi Usmani, jurists do not consider the verses 30:39 and 4:161 to clearly prohibit Muslims from riba, whereas the latter two (3:129-130 and 2:275-280) do. Another orthodox scholar, M. N. Siddiqi, also believes 2:275-80 "establishes" that riba is "what is over and above the principal" and that "it is unjust".

• There is "insufficient indication" to prohibit riba from verse 30:39 according to Fofana because sources disagree on what it refers to. Muhammad ibn Jarir al-Tabari quotes a number of Tabi'een (Muslims who were born after Muhammad died but who were old enough to be contemporaries of the Sahaba "Companions"), who state that (Quran 30:39) refers to a gift, whereas al-Jawzi quotes Hasan al-Basri as stating it refers to riba.
• Verse 4:161 refers to the Jews and their taking of riba, which leaves it unclear if such a prohibition applies to the Muslims.
• However 3:129-130 is seen by many as prohibiting riba, including Taqi Usmani and Ibn Hajar al-Asqalani (a medieval Shafiite Sunni scholar of Islam). Fofana however, thinks "the verse itself could be interpreted as expressing a preference against interest", so interpreting the verse as prohibiting riba may require support from some ahadith "relating to Amr ibn Aqyash".
• Along with Youssouf Fofana and Taqi Usmani, Mohammad Nejatullah Siddiqi, interprets Quranic verses (2:275-2:280) to mean that riba is not only "categorically prohibited" and "unjust" (zulm), but is defined as any payment "over and above the principal" of a loan. Other orthodox sources agree.

On the other hand, the second caliph `Umar was of the opinion that those riba verses (2:275-280) were ayat al-mujmalat, i.e. classified as "ambiguous" verses of the Qur'an, (according to Al-Shafi‘i jurist Fakhr al-Din al-Razi), as were a number of classical jurists including Ibn Rushd (see below). They restricted the application of riba to "the clarification by the Tradition [ahadith] that refers to riba in sale".

Umar, also declared that the verse of riba (among 2:275-280) was the last revealed verse of the Qur'an, and that Muhammad had died before being able to explain it fully according to a hadith reported by Ibn Majah. (However, according to Taqi Usmani, this hadith is not as authentic as that of another where one of the narrators in the change of transmission was more reliable. This hadith indicates that the last verse was actually 2:281—one not mentioning riba.)

Raqiub Zaman argues against the orthodox translation of riba as any

"excess or addition -- i.e. an addition over and above the principal sum that is lent." If Muslim jurists are referring to interest as usury on the basis of this literal meaning of riba, than naturally one wonders why God Almighty used the terms `doubling` and `quadrupling` (the sum lent) as usury in 3:130 ... and why there was no further clarification of this verse in the Quran or by the Prophet.

Taqi Usmani argues that the words "doubled" and "tripled" in the verse are not "restrictive" to defining riba, and like some other words in the Quran are used "for emphasis or for explaining" and do not restrict or qualify the command preceding them. Other classical jurists ("like al-Baji and al-Tawwafi, to name only two"), believed riba was `amma, a "general term" meaning it "is definitive or free of speculative content", according to Farhad Nomani.

The background of these verses was the dispute between two clans, Banu Thaqif and Banu Amr ibn al-Mughirah, over riba due on loans between them. the verse is addressed to the Banu Thaqifa who insisted that they be able to collect riba from the Banu Amr ibn al-Mughirah despite having signed a peace treaty forgoing claims of riba.

According to Fofana, historically (most) jurists agreed on the prohibition of riba from these verses and termed it riba al-nasia, distinguishing it from riba al-fadl — the exchange of like goods in different quantities at the same time, mentioned in a number of narrations.

Disagreeing with the orthodoxy is author/economist Muhammad Akram Khan who writes that since the verse is addressed to the Banu Thaqifa it is a "specific reference" addressing a "historical situation" (according to Khan) and does "not institute a law that could make dealings in riba a state crime."

Hadith and prohibition

Riba is mentioned in a number of ahadith (i.e. the body of reports of the teachings, deeds and sayings of the Islamic prophet Muhammad that often explain verses in the Quran).

While Usmani, Siddiqi and some others orthodox writers maintain that riba is both defined and prohibited by the Quran, M.O. Farooq states that "it is commonly argued" that it is "defined by hadith" and only condemned in the Quran (Farooq himself disagrees that hadith define riba and believes they provide "more of a conundrum than a definition"). Thus textual proof for the position that all forms of interest are riba and hence prohibited by Islamic law is based on hadith, according to this argument.

According to another scholar, Farhad Nomani, among the schools of fiqh, "... The classical Hanafi, some famous classical Shafi`i (e.g., al-Razi) and Maliki (e.g., Ibn Rushd) jurists were of the opinion that riba in the Qur'an was an ambiguous (mujmal) term, the meaning of which was not clear per se," consequently this ambiguity had to be cleared up by ahadith.

One set of ahadith is Muhammad's farewell sermon, where he is reported to have said:

"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."

Several narrators including Jabir, Abdul Rahman ibn Abdullah ibn Masoud, say that

Muhammad cursed the accepter of usury and its payer, and one who records it, and the two witnesses, saying: They are all equal.

However Farooq insists that contrary to traditionalists and activists claims, ahadith commonly cited to define riba as interest are not unambiguous.

The ambiguity and lack of clarity of what constitutes riba is reported to been indicated by Caliph `Umar, who was one of the closest companions ofMuhammad and who included it among the three concepts that "it would have been dearer to me than the world" had Muhammad "explained them clearly" (see above). And by twentieth century Islamic scholar, Fazlur Rahman Malik, who sums up his analysis of the ahadith on riba saying: "In short, no attempt to define riba in the light of Hadith has been so far successful".

According to Farhad Nomani "it is known that Ibn `Abas", a companion of Muhammad, "was of the opinion that the only forbidden riba was the pre-Islamic riba." Nomani state that classical jurists "all agreed" that the meaning of riba was not "free of speculative content", because there was a difference between

• the "linguistic and customary meaning" of Riba in the pre-Islamic period on the one hand, and
• the "specification by the Tradition (ahadith) and the ambiguity of the opinions of the close companions of the Prophet on the problem of [the meaning of] riba on the other hand."

According to another scholar, the mufti of Egypt, Dr. Muhammad Sayyid Tantawy, there is nothing in the Quran or Hadith that prohibits the pre-fixing of the rate of return, as long as it occurs with the mutual consent of the parties.

Importance

Replying to the non-orthodox, Taqi Usmani argues that scripture concerning riba cannot be ambiguous (or mutashabihat) because God can not "wage war against a practice, the correct nature of which" is unknown by Muslims. Only those verses for which "no practical issue depends on its knowledge" may be ambiguous (according to Usmani).

Orthodox point to a number of ahadith indicating the gravity of the sin of committing riba. Abu Huraira is reported to have narrated:

The Prophet said, "Avoid the seven great destructive sins." The people inquire, "O God's Apostle! What are they? "He said, " To associate others in worship along with God, to practice sorcery, to kill the life which God has forbidden except for a just cause, (according to Islamic law), to eat up Riba (usury), to eat up an orphan's wealth, to give back to the enemy to flee from the battlefield at the time of fighting, and to accuse chaste women who never even think of anything touching chastity and are good believers."

According to Sunan Ibn Majah, the Islamic prophet Muhammad declared the practice of riba worse than "a man committing zina (fornication) with his own mother".

Companions and jurists

Farooq notes that a number of early jurists questioned whether riba was interest.

Some note the wording of aya 3:130,

Imam Ahmad ibn Hanbal (780–855 CE), believed only Riba an-jahiliya (where the amount owed "doubled and redoubled" each year if not paid off) was unlawful "without doubt from the Islamic viewpoint". According to Nabil A. Saleh, several companions (Sahabah) of Muhammad (Usama ibn Zayd, Abdullah ibn Masud, 'Urwah ibn Zubayr, Zayd ibn Arqam), including Ibn Abbas, one of the major companions of the Prophet and earliest of the Islamic jurists, also "considered that the only unlawful riba is riba al-jahiliyyah".

Classical jurists and most Muslims believe riba to be "a general term" with a broader definition of any interest, while

Fazlur Rahman defined riba as "exorbitant increment whereby the capital sum is doubled several-fold, against a fixed extension of the term of payment of the debt."

Sharia and riba

According to Farhad Nomani while classical jurists had "a consensus of opinion about the prohibition of riba", they disagreed on the "interpretation of the primary Islamic sources and, consequently, over the details of the ruling on riba", they believed that the "objects of riba occur in sale, and, only by analogy they related riba to loan, considering the latter a gratuitous contract."

How Muslims should deal with riba is disputed. Some believe riba is a violation of sharia (Islamic law) to be prohibited by the state and violators punished. At least one scholar (Abdulkader Thomas) has stated that not only is interest in violation of sharia but is such a menace that failure to "combat" it indicates unbelief. According to Thomas, "Riba is part of a broader problem of belief and behavior. Refusing to combat riba is akin to disbelief. Conceding the argument that money has an intrinsic value is potentially a greater act of disbelief", (potentially punishable by death). Others believe it is simply a sin to be left to God to judge and punish.

Author/economist Muhammad Akran Khan has noted that contemporary orthodox scholars have argued that interest is a violation of sharia law primarily on the basis of two sources:

• the Farewell Sermon (mentioned above where the Prophet abolished all claims of riba on loans),

God has decreed that there will be no usury, and the usury of ‘Abbās b. ‘Abd al-Muṭṭalib is abolished, all of it.

• and the fact that the Banu Thaqif clan was threatened with war by Muhammad for abrogation of their treaty with the early Muslims if they tried to collect interest on loans from Muslims. (Banu Thaqif are the ones who are warned against "being at war with God and His messenger" in Quran 2:275-280.)

However, Khan argues, "the Prophet could easily have announced the broad features of such a law [against Riba]. The fact is that neither the Prophet nor the Qur'an has announced any law relating to interest", as they had "in the case of theft, adultery or murder. .... Neither the Prophet nor the first four caliphs nor any subsequent Islamic government ever enacted any law against riba." Attempts to do so are "quite recent".

The "authentic books of Islamic jurisprudence (fiqh) produced throughout Islamic history" had "sections dealing with riba", discussing "its nature and what makes a transaction lawful or unlawful", but according to Khan, until recently none contained "any public law for enforcement through state machinery." The treasure of Islamic jurisprudence which has covered all facets of life, including imaginary situations, does not mention any punishment for one who indulges in riba." In 1999 a work did. The Blueprint of Islamic financial system including strategy for elimination of Riba by the International Institute of Islamic Economics, called for riba-based transactions to be punishable by law.

Another scholar (Olivier Roy) points out Ayatollah Ruhollah Khomeini's book of fatawa Tawzih al-masa'il, written before 1962, as an example of a more traditionalist attitude toward riba, or at least the charging of interest on loans. Rather than calling for a ban on interest, Khomeini states that lending without charging interest, "is among the good works" (Mustahabb) that are "particularly recommended in the verses of the Quran and in the Hadiths."

Scriptural proof and fiqh

According to Abdulkader Thomas, there are "six authenticated hadith that allow" Muslims to define all kinds of interest as riba.

Madhhab (schools of fiqh), differ somewhat in their interpretation of riba. The Shafi'i hold that injunctions for riba apply to gold and silver currency but not fils (non-precious metal currency). "Thus, one hundred fils [coins made of neither silver or gold] could be exchanged for two hundred either on the spot or on a deferred delivery basis." By extension this would apply to contemporary fiat [i.e. paper] money, according to Abdullah Saeed.

(One author—Imad-ad-Dean Ahmad—argues "ribâ as it is used in the Qur'an and sunnah" is not the same as interest. This is not because riba can only involve loans using gold and silver currency, but because instead of interest riba is actually the "now common practice of issuing unbacked paper currency". To end this sin states must return to the gold standard.)

Critic of the all-interest-is-riba formulation, M.O.Farooq, makes a number of criticisms of logic employed using hadith to establish the connection.

• That when it comes to "people's life, honor and property ... laws, codes or dogmas" must be established with special care.
• That even sahih ahadith provide "probabilistic" and not "certain knowledge". In light of this he complains that one hadith cited by orthodox scholars and purported to be "rigorously authenticated"

turns out to be da'if (i.e. weak)

• That in defining riba the underlying reason for forbidding it should be given first consideration. Farooq criticizes the dismissal of justice by Taqi Usmani as an element of logic in sharia on the ground that "Zulm (Injustice) is a relative and rather ambiguous term the exact definition of which is very difficult to ascertain. Every person may have his own view about what is or what is not Zulm." Two orthodox writers (Abu Umar Faruq Ahmad and M. Kabir Hassan), admit that the idea that the rationale for prohibition of riba as formulated in al-Qur'an was injustice and hardship finds some support in Quranic verse 2:279 and in the works of some early scholars like Imam Razi and Ibn Qayyim for whom "it appears that what is prohibited is the exploitation of the needy, rather than the interest itself".

Another critic, Abdullah Saeed, complains that the schools of Islamic jurisprudence have ignored "rationale/wisdom" (hikmah) and arrived at a legal "cause" (`illa) for riba "which had nothing to do with the circumstances of the transaction, the parties thereto, or the importance of the commodity to the survival of society." One result of this legalistic thinking is that hiyal could be and has been used "from the medieval period to the present day", to create loans based on "fictitious transactions" charging "exorbitant rates of interest" with the blessings of orthodox jurists.

Interest and riba an-nasiya

Issues in forbidding interest as riba an-nasiya

Most Muslims and most "non-Muslim observers of the Islamic world" believe that interest on loans is forbidden by Islam. This "orthodox" poisition is also "by far the most influential" fortified by "voluminous and overwhelming" scholarly literature. Among the Islamic bodies that have declared all interest to be riba include the First International Conference on Islamic Economics (1976), the Fiqh Academy of the Organisation of Islamic Cooperation (1986), the Research Council of al-Azhar University (1965), the Federal Shariah Court of Pakistan in a 1991 judgement. Scholars and authors that have declaring that there is a consensus (ijma) on the subject include Abu al-‘Ala Mawdudi (1903–79), Yusuf al-Qardawi, Wahba Zuhayli, Tariq Talib al-Anjari, Thanvir Ahmed, Mabid al-Jarhi, M.N. Siddiqi, M.U. Chapra, Munawar Iqbal and Imran Ahsan Khan Nyazee. In Islamic economics, a prohibition of interest on loans in the name of prohibiting riba, has been called that field's "most salient objective".

Its importance among Islamists/revivalist Muslims was reflected in the uproar created in the Pakistan parliament in 2004 after a Member of Parliament (MP) quoted an Egyptian Islamic scholar decreeing that bank interest was not un-Islamic. In response an Islamist MP stated that no member of parliament had the right to negate this "settled issue" since the Pakistan state Council of Islamic Ideology had decreed that interest in all its forms was haram in an Islamic society.

Among some (such as Imran Nazar Hosein) interest on loans constitutes not just a sin or crime but the

"grand design of hostile forces who have already made considerable progress, through riba, in gaining control over mankind. Their aim is to gain total control and to use that power to destroy faith in Allah."

However, not all Muslims agree with the formulation interest=riba. Doubters of the connection between contemporary "bank interest" and riba include 20th century Modernist jurists, such as Muhammad Abduh, Rashid Rida, Mahmud Shaltut, Syed Ahmad Khan, Fazl al-Rahman, Muhammad Sayyid Tantawy, and contemporary scholars such as Fathi Osman, Nawab Haider Naqvi, Salim Rashid, Imad al-Din Ahmed, Omar Afzal, Raquibuzzaman, Abdulaziz Sachedina, Abdullah Saeed, Mahmud El-Gamal and Mohammad Fadel).

One non-orthodox economist argues there cannot have been a true consensus (ijma) because it would require the agreement of not just Islamic scholars but the Muslim community whose failure to use Islamic banking for most of their assets shows they do not agree.

Rationale

A number of arguments have been advanced by orthodox/Islamist/revivalist scholars, preachers, writers and economists for the hikmat (underlying wisdom or philosophy of the law) prohibiting interest on loans. They include that interest (in their view) is a form of exploitation by the lender of the borrower and/or by the rich of the poor, leads to less prosperity and more injustice in the form of increased inequality and less human sympathy, is unIslamic because it allows gain from financial activity without risk of potential loss, should not exist because money is unproductive and charging a price for it is unfair. And that contrary to what conventional, non-Islamist economists argue, (according to the orthodox view) banning interest would not hamstring crucial savings and investment but greater stability, efficiency, development etc.

Whatever the reasons advanced for banning interest orthodox scholar Taqi Usmani emphasizes the importance of obedience over reason, since "there are areas in which human reason cannot give proper guidance". "The Holy Qur'an has itself decided what is injustice in a transaction of loan, and it is not necessary that everybody finds out all the elements of injustice in a riba", [thus] it is the firm belief of every Muslim that the commands given by the divine revelations ... are to be followed in letter and spirit and cannot be violated or ignored on the basis of one's rational arguments ..."

Ismail Ozsoy argues that no matter how knowledgeable and eager the borrower and lender, or how low the rate of interest paid, both the payer and the receiver of interest are sinful and unjust because the interest 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."

Yusuf al-Qaradawi argues that those who earn income from interest will not have to work, leading to the interest drawers' contempt for work and depriving others of the benefits of the interest drawers' industry and efforts.

Mohammad Nejatullah Siddiqi argues that charging interest on loans is a type of forbidden exploitation. If a loan is for "consumption" (to buy consumer goods), those who have wealth should assist those without and not charge any increment above principal. In "productive loans" (i.e. for a business to invest in plant or equipment), a guaranteed return on capital is unjust because there is no sharing of profits between entrepreneur and financier, the borrower is "obliged to pay to the bank an extra amount," i.e. interest Hameedullah also argues that interest is unjust because the borrower bears risk but (he believes) the lender does not, which violates the Islamic principle that (he believes) reward should require being liable/taking risks.

Taji al-Din argues that charging interest on loans restricts the circulation of wealth to those who already have it, since lenders do not provide loans to those who are unable to repay them. This (he believes) is forbidden by the Quran and results in an increase the divide between the rich and poor. "Islamic socialist" Ghulam Ahmed Pervez, (not otherwise known for his orthodoxy), also argued the Quran banned interest as exploitive. al-Qaradawi states since "the lender is very likely to be wealthier and the borrower poorer ... If interest is allowed, the rich will exploit the poor". In contrast, Taqi Usmani is concerned about "rich industrialists" who borrow "huge" amounts for "their huge profitable projects" and exploit lenders by only paying interest and not sharing their huge profits. On the other hand, he states elsewhere that "the intrinsic nature" of interest and not the "financial position of the parties" make loans charging interest invalid, (so that not-so-rich industrialists with smaller, marginally profitable projects are just as forbidden).

Interest is also alleged to cause macroeconomic instability. Mirakhor and Krichene argue that interest charges on debts lead to the creation of a secondary market for debt. This leads to debt changes hands, multiple layers of it being created, and the generation of credit bubbles whose inevitable bursting destabilizes the economy. Umer Chapra also argues that "the erratic behaviour of interest rates" has caused "three decades" of "turbulence in the financial markets", citing Nobel Laureate in economics Milton Friedman.

According to Taqi Usmani, interest-based financing may "fuel inflation" since it "does not necessarily" finance the creation of real assets", and may increase the supply of money without increasing products to match it.

Islamist leader Abul A'la Maududi states that the charging interest on loans causes an imbalance between production and consumption, by the transferring of purchasing power from those with a propensity to consume to those with a propensity to invest. This transfer of income increases production and decreases consumption which (somehow) increases prices of consumer goods, reinforcing this process which (Maududi believes) results in economic evils such as stagnation, depression, monopoly and ultimately imperialism. Eliminating return on capital with interest-free loans along with zakat, and profit-share would restore 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.

Ibn Rushd argued the rationale for prohibition relates to the possibilities of cheating that exists in riba, which is clearly visible in riba fadl. M. N. Siddiqi also states interest "corrupts" society and "demeans and diminishes human personality".

Another alleged deficiency of interest on loans is that it "lends itself to speculation" as lenders seek higher interest rates (allegedly) borrowing at low interest rates to lend at higher ones. This (allegedly) disrupts "trade cycles" and interferes with economic planning and would be remedied by banning interest charges.

On a more conceptual level, Taqi Usmani and others insist that money is different from other things of value—it has no intrinsic utility, does not have "different qualities", is interchangeable with other money of the same value—and so unlike commodities and products must not be "rented" (i.e. lent out for a period of time in exchange for payment).

Alleged benefits of forbidding

Orthodox scholars/Islamists have often contrasted interest-based lending unfavorably with a number of alternatives: profit and loss sharing, "credit sales" (where a seller finances the purchase of a product and takes deferred payment—see below), and zero interest rates on deferred payment.

Muhammad Siddiqi states that replacing fixed rates with profit-and-lose-sharing would make the financial system more stable and more entrepreneurial. Mannan argues that replacing interest with profit and loss sharing would stimulate job creation and economic vitality and would be in line with the cooperative norm of the Quran.

Arguments against rationale

Defenders of the use of bank interest (principally M.A.Khan and M.O.Farooq) reply that that orthodox opponents provide scant evidence that interest is to blame for what the orthodox allege or that banning interest would do what they say it would. Often legitimate complaints about world financial status quo (economic inequality, over indebtedness and speculation, providing for riskless markets that don't need funds at the expense of slightly more risky market that could use finance) are used to draw illegitimate conclusions that the solution is a ban on all interest.[[{{{first}}} {{{last}}}]] Arguing against the idea that charging interest on loans exploits entrepreneurs, M.A. Khan cites rates of profits of business enterprises from developed countries over some decades, showing that profits were "consistently higher by several multiples" then the rates of interest. Concerning the alleged injustice of fixed return by borrowers and their failure to take risks of losses, Farooq asks if lenders aren't "renting out" the purchasing power of their capital for the length of the loan and like landlords and rental agencies due interest payment as a form of rent as much as any landlord or provider of something valuable to a renter.

Ifit is unjust to take fixed payment rather than a share of profits and losses, why are fixed rent and fixed wages not unjust as well? (While some Islamist thinkers have promoted the idea that 'labor owned firms would express the spirit of Islam better' there is no movement to restrict businesses to profit-sharing payment for employees or even "extensive debate on the subject".) To the claim that collecting interest on a business loan when the business has gone insolvent is unjust, Khan replies that in the overwhelming majority of cases both banks and lenders benefit from loans and it's not sensible to let the small fraction of bankruptcies dictate how finance is structured.

Mohammad Omar Farooq asks why Siddiqi does not even attempt to provide evidence for the social and personal corruption of charging interest, noting monitors of corruption such as Transparency International do not consider it a source of corruption. Farooq replies to Qaradawi's statement that interest leads to sloth by stating that matching the savings of savers/depositors with the capital needs of borrowers is an economically useful and competitive function, and that many savers are retired elderly of modest means who can no longer work and seek conservative ways to make money from their life savings.

To argument that interest violates the hadith stating that "profit arising from something which does not involve liability (to accept loss)" is unlawful, Khan notes that asset-based lending also does not involve liability and in any case bankers face the "risk of non-payment, delayed payment, erosion in the value of money" from inflation.

To the argument that interest has been prohibited by Shariah because of its "negative role in the economy," Khan notes that interest-based finance is "deeply entrenched" in the developed countries of the OECD yet per capita income is quite high and the percentage of poor people "quite" low. It is true that the debt burden in many poor developing countries has created a hardship, denying funds for human needs and development, it must be asked whether this stems from the fact that the loans charge interest, or "mismanagement, fraud and corruption" that wasted the borrowed funds. A further question is whether Islamic lending would help poor countries that cannot pay their debts since as mentioned above, economists of Islamic finance agree abolishing interest would not mean abolishing any kind of cost to Islamic finance.

In answer to the charge (by Taji al-Din and Monzer Kahf) that interest-bearing loans increase division between the rich and poor because lenders will not loan money "to those who are unable to repay them" if the loans charging interest, M.A. Khan replies that "no business firm will extend credit to a customer until it is satisfied with its credibility".

M.O. Farooq replies to M. Umer Chapra contention that Western economist, Milton Friedman, agreed that interest has caused financial instability by quoting an email by Friedman stating that his quoted writing did "not provide any support whatsoever for the zero interest doctrine" and that he did "not believe there is any merit to the argument that an interest-free economy might contribute toward greater economic stability. I believe indeed it would have the opposite effect." He also notes that the countries that have gone in an "'interest-free' direction" are "hardly examples of greater economic stability."

In reply to Mirakhor and Krichene's warning of the dangers of destabilizing credit bubbles, M.A.Khan argues that a secondary market for financial instruments "is a real live need" of finance, even if it may pose a risk of speculation. "Even if we eliminated interest ... the alternative instruments of finance such as sukuk and other Islamic bonds would also require a secondary market." And in fact there have been "efforts to create" these markets for Islamic financial instruments but the need to follow the ideology of contemporary Islamic finance means that the markets "have ended up in a host of ruses, compromises and strategems".

Alternatives

Further information: Islamic banking

In arguing that any interest on loans and any "increased amount was charged on the principal amount of a debt", is forbidden in Islam, leading orthodox scholars such as Taqi Usmani, (writing in The Historic Judgment on Interest Delivered in the Supreme Court of Pakistan) cite ahadith such as,

• "Every loan which derives a benefit is a kind of riba."
• "If one of you has advanced a loan and the debtor offer the creditor a bowl (of food), he should not accept it, or if the debtor offers him a ride of his animal (cattle) the debtor must not take the ride ...".

Statements by Usmani himself seems unequivocal on the subject: "The Holy Prophet [Muhammad] ... has left no ambiguity in the fact that the creditors will be entitled to get back only the principal and will not be able to charge even a penny over and above the principal amount"; "The prohibition was meant to cover every amount charged in excess of the principal".

Some commentators both defending and criticizing the orthodox idea of interest-free Islamic banking have framed it in terms of paying no return on loans. Muhammad Siddiqi claims that interest-free accounts paying no return to savers would not mean a drastic reduction of savings because savings is mainly a function of the income of the savers rather than their expectation of any return. Mawdudi states that zero return loan would allow production that is socially useful but generates a small return to flourish. Sidiqqi states intestis unjust because the borrower is "obliged to pay to the bank an extra amount," i.e. interest

On the critical side, economist Maha-Hanaan Balala questions how creditors would ever extend interest-free loans considering "the opportunity cost, erosion of value through inflation, risk of default by debtors".

Notwithstanding these arguments, there is reportedly "a consensus" among Muslim economists that Islamic finance for commercial transactions "would not be free", but would have some kind of "cost" other than interest. Taqi Usmani writes: "People not conversant with the principles of Shari'ah and its economic philosophy sometimes believe that abolishing interest from the banks and financial institutions would make them charitable, rather than commercial, concerns which offer financial services without a return. Obviously, this is totally a wrong assumption. According to Shari'ah, interest free loans are meant for cooperative and charitable activities, and not normally for commercial transactions ..."

• 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 capital—and perhaps even management—of a project or deal, and both share in the profits or losses according to their equity shareholding.

Interest and credit sales

This includes increases in a sale price: "the Riba prohibited by the Holy Qur'an ... had different forms ... At times, this debt was created through a transaction of sale and it was created through a loan"—but in another work (Introduction to Islamic Finance) Usmani explains that if a transaction of sale involves increased the price "taking the time of payment into consideration", that increase does not come "within the ambit of interest", i.e. riba.

Getting 90 days credit on a Rs10000 (cash price) product and paying an extra Rs500, may cost the same as paying in cash, using a three-month loan at 20% per annum. But while the exchanges are equivalent in the eyes of standard accounting practices and truth-in-lending regulations, they are not to orthodox scholars.

According to this (second) theory Islamic banking forbids even low interest as riba on cash loans, it does not forbid paying back over time more for an item, than that item cost in spot payment (immediate payment). An example being "credit sales" (such as involved in murabaha, the "most common" mode of Islamic financing).

Paying more for credit when buying a product does not violate sharia law because it is "an exchange of commodities for money" while a bank loan is "an exchange of money for money" and forbidden unless interest is zero ("effected at par value"). The buyer in a credit sale is paying not "interest" and "principal", but "cost" and "profit".

Attaching commodities to money in finance prevents money from being used for speculative purposes, according to other orthodox writers (such as Monzer Kahf).

This distinction between credit sales and interest has been criticized as a way of charging interest using another name, by at least one opponent (M.A. Khan) and one supporter (Khalid Zaheer) of the interest=riba formulation. Khan calls it "frivolous and laboured", necessary because businesses "cannot survive where cash and credit prices are equal". Zaheer notes the lack of enthusiasm of orthodox scholars—such as the Council of Islamic Ideology—for credit sales-based Islamic Banking, which (the council) calls "no more than a second best solution from the viewpoint of an ideal Islamic system."
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To deal with the problem of zero interest creating unlimited demand for investment that is limited in supply, activists such as 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.

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.

Critics claim that Islamic banks have "found it impractical to obey their own charters" and that they have "disguised interest under a variety of charges".

International finance

One area where complaints about interest charges has gone beyond revealed truth as interpreted by Islamic scholars concerns the external debt of developing countries, where in some cases the borrowers have already paid the sum they borrowed "several times, but the debt grows faster than they can repay it". Some heavily indebted countries include Afghanistan, Comoros, Guinea, Malawi, São Tomé and Príncipe. The movement for debt forgiveness (Jubilee 2000) does not argue that interest itself is sinful but that both interest and principle of large external loans should be forgiven because: debt repayment would be better spent on poverty reduction, lenders should have known that the borrowing countries poor inhabitants are not responsible for the debt because it was lent to dictators or oppressive regimes, with much of the money was lost to corruption and wasteful projects.

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.

Substitute for interest

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).

Time value of money

One concept instrumental in explaining (and defending) the charging of interest on loans is the time value of money—the idea that there is greater benefit in receiving money now rather than later, so that later payment should be discounted and savers/investors/lenders who defer consumption be compensated. As such, some Islamic finance supporters have attacked the concept, Irfan argues that the value of money diminishes very little over time because some consumption—such as eating—can only be done over time, and that negative outcomes such as unsustainable production leading to desertification, are encouraged by discounting for time since the desertification comes in the discounted future. However, since Islamic banking also calls for rewarding delayed gratification in the form of "return on investment", most Islamic scholars and economists have taken a middle path—insisting that time value of money is an invalid concept if the rate of discount over time is interest on a loan, but not if it is the `rate of return` on capital.

Early payment of debt

The opposite of credit sales (i.e. higher charge for deferred payment) is reduced charges for early payment, and also implies an acknowledgment of the time value of money and validity of interest on loans according to some (M.A. Khan).

It is considered haram by the four Sunni schools of juriprudence (Hanafi, Maliki, Shafi'i, Hanbali), but whether there is a consensus of jurists is unclear. According to Ridha Saadullah, such reductions have

been permitted by some companions of the Prophet and some of their followers. This position has been advanced by Ibn Taymiyya and Ibn al-Qayyim, and it has, more recently, been adopted by the Islamic Fiqh Academy of the OIC. The Academy decided that `reduction of a deferred debt in order to accelerate its repayment, whether at the request of the debtor or the creditor is permissible under Shariah. It does not constitute forbidden riba if it is not agreed upon in advance and as long as the creditor-debtor relationship remains bilateral. ...

Inflation

Whether and how to compensate lenders for the erosion of the value of the funds from inflation, has also been called a problem "vexing" Islamic scholars, since finance for businesses will not be forthcoming if a lender loses money by lending. Suggestions include indexing loans (opposed by many scholars as a type of riba and encouraging inflation), denominating loans "in terms of a commodity" such as gold, and doing further research to find an answer. (One source suggests that there is no problem. Volume 1 of Investment Laws in Muslim Countries Handbook, states "an interest rate that did not exceed the rate of inflation was not riba according to classical Islamic jurists."

Not all sources are vexed, however. Islamqa.info merely states, "Yes, it is haraam to pay interest on loans even if that is because of inflation. The scholars are agreed that if it is stipulated that a loan be repaid with something extra, that is riba (usury) which is forbidden by Allaah and His Messenger." Abu Umar Faruq Ahmad and M. Kabir Hassan state that: "Qur'anic injunctions against riba, and must be accepted as they stand." Using "interest to neutralise inflation would tantamount to using a bigger ‘evil’ [interest] to fight a smaller one [inflation].

Delinquent payments/Defaults

While in conventional finance late payments/delinquent loans are discouraged by accumulating interest, control and management of such accounts has become a "one of the vexing problems" in Islamic finance, according to M.A. Khan. According to Ibrahim Warde,

Islamic banks face a serious problem with late payments, not to speak of outright defaults, since some people take advantage of every dilaroty legal and regal and religious device ... In most Islamic countries, various forms of penalties and late fees have been established, only to be outlawed or considered unenforceable. Late fees in particular have been assimilated to riba. As a result, `debtors know that they can pay Islamic banks last since doing so involves no cost`

Warde also complains that

"Many businessmen who had borrowed large aamounts of meny over long periods of time seized the oppostunity of Islamicization to do away with accumulated interest of their debt, by repaying only the principal -- usually a puny sum when years of double-digit inflation were taken into consideration.

Permitting "bank interest"

Explanations for why some Islamic scholars judge bank interest permissible include the tendency for rulers to get the fatwas they want on "key policy issues" from "official" ulama "whose task it is to legitimize" rulers' policies. Egyptian President Anwar Sadat obtained a fatwa from the Sheikh of al-Azhar ruled that interest-bearing treasury bonds were consistent with Islamic law. More recently the mufti of Egypt, Dr. Muhammad Sayyid Tantawy issued several fatawa permitting bank interest in 1991. In 1997 Shaykh Nasr Farid Wasil (Grand Mufti of Dar al-Ifta al-Misriyyah at the time) also declared bank interest permissible provided the money was invested in halal avenues: "there is no such thing as an Islamic or non-Islamic bank. So let us stop this controversy about bank interest." Dr Abd-al-Munim Al-Nimr, an ex-minister of 'Awqaf in Egypt, publicly stated that banking interest cannot be considered riba.

(Historians note the practice is not new and that jurists legitimized interest for awqaf (religious endowments) during the late period of the Ottoman rule (as mentioned above).)

But not all jurists opposing the formulation interest=riba are tied to governments. Doubters of the connection between contemporary "bank interest" and riba include 20th century Modernist jurists, mentioned above. In addition, Modernists interpreters of riba on the India-Pakistan subcontinent include: Ja'afar Shah Phulwarai (1959), Tamanna Imadi (1965), Rafiullah Shihab (1966), Yaqub Shah (1967), Abdul Ghafur Muslim (1974), Syed Ahmad (1977), Aqdas Ali Kazmi (1992), and Abdullah Saeed (1995, 1996).

Modernist definition

Islamic Modernists tend to "emphasise the moral aspect of the prohibition of riba, and argue that the rationale for this prohibition as formulated in al-Qur'an was injustice and hardship." Islamic Modernists defined riba as the money lending practices of the Makkan society (Riba an-jahiliya) where the Quran was revealed. Modernists believe these practices were much different from and more problematic than, contemporary bank lending, according to sources such as M.A. Khan and The Encyclopedia of Islam and the Muslim World. Makkan lending involved high interest rates charged by rich money lenders to poor customers who borrowed for purposes of consumption and led to the accumulation of large debts and often financial slavery. In contrast, most money loaned In contemporary society is for commercial purposes and investment, transacted between sophisticated parties, offering/paying interest rates determined and kept low by a competitive and regulated market—most of these features not in existence when the Quran was revealed.

Furthermore, contemporary bankruptcy laws "protect borrowers against the horrors once produced by riba", and "the goal of eradicating interest is both misguided and unfeasible," because interest is "indispensable to any complex economy".

Harm to borrower

Islamic Modernist scholar such as Fazlur Rahman Malik, Muhammad Asad, Sa'id al-Najjar, Sayyid Tantawi, differ from the orthodox interpreters in arguing that interest is not riba unless it involves exploitation of the needy. They differentiate between various forms of interest charges advocating the lawfulness of some and rejecting others.

Abd-al-Munim Al-Nimr, also argues that riba must involve harm to the debtor. In his fatawa permitting bank interest and declaring it non-riba, Muhammad Sayyid Tantawy argued it makes little sense to suggest that modest saving account holders are exploiting sophisticated multibillion-dollar banks that pay them the interest on their accounts. Fixed return or "determination of the profit in advance is done for the sake of the owner of the capital (that is the depositor) and is done to prevent a dispute between him and the bank," rather than to exploit.

Practicality

Turkish-American economist and Islamic Studies scholar Timur Kuran questions whether an economy without interest has ever existed: "As far as is known, no Muslim polity has had a genuinely interest-free economy."

In answer to the complaint that it is unjust to have an income fixed (by an interest rate) for the lender while the profits of the borrower can never know with complete certainly, capital markets give greater returns (on average) for greater risk, and the lower risk of a fixed income return is compensated with lower returns (on average) than returns from shared profits.

Writers such as Fazl al-Rahman argue that an interest rate serves as a price for financing, limiting demand for it by borrowers. If the cost of finance (i.e. interest rate) were reduced to zero, finance markets will be faced with limited supply and infinite demand. How would credit be allocated? (This problem would apply to interest-free loans but not profit-share, cost-plus basis, or leasing of financing.)

They also advanced rational economic arguments that market rate interest is not riba because it serves the public interest (Maslaha) by allowing for efficient allocation of resources, economic development.

Application

One critic of the campaign against "the curse of interest" in Pakistan, lawyer and Islamic scholar Kemal A. Faruki, complained that much time and energy were spent on "learned discussions on riba" and "doubtful distinctions between `interest` and `guaranteed profits,`" in the Western-style banking system, while a far more serious problem affecting the poor was ignored:

usury perpetrated on the illiterate and the poor by soodkhuris (lit. `devourers of usury`). These officially registered moneylenders under the Moneylenders Act are permitted to lend at not more than 1% below the State Bank rate. In fact they are Mafia-like individuals who charge interest as high as 60% per annum collected ruthlessly in monthly installments and refuse to accept repayment of the principal sum indefinitely. Their tactics include intimidation and force.

Future

Mohammad Omar Farooq argues the prevailing doctrine of interest-equals-riba may eventually follow other such "long-standing orthodox" but no longer accepted views, such as hadd capital punishment for apostasy from Islam, or that "triple talaq" (i.e. divorcing your wife simply by declaiming "talaq" three times) is "valid and enforceable".

Reply to Modernists

Most of these arguments have been criticized by Islamic revivalist writers, including Siddiqi, Zarqa, Khan & Mirakhor and Chapra, and especially by Taqi Usmani's "Judgement on Interest Delivered in the Supreme Court of Pakistan".

Taqi Usmani argues that commercial, industrial and agricultural (as opposed to consumption) loans could not have been unknown to Arabs in the era of Muhammad since ahadith mention large loans and large scale caravans used by Arab traders. Arabs of Muhammad's era also had "constant business relations" with the adjacent Byzantine province of Syria (Arabs used its dirhams (of silver) and dinars (of gold) for currency) where interest bearing loans were so widespread that a separate law was enforced to fix their rate of interest. He also points out that there are a number of references to "all" riba being forbidden in ahadith, and all excess over principal being riba, but no mention of some smaller amount of interest being permissible.

Riba al-fadl

While riba an-nasiya=interest is a major issue among Islamist/revivalist preachers, writers and economists, and forms the basis of Islamic Banking, the other type of riba—what jurists call riba al-fadl ("surplus riba") -- is also forbidden by orthodox jurists.

Because riba al-fadl involves barter, and barter is much less common than in early Meccan society, riba al-fadl is much less discussed than riba an-nasiya. It is also considered (at least by some sources) a form of riba prohibited by the Sunnah but not by the Quran.

Taqi Usmani states that Riba al-fadl was developed by Muhammad and so was not part of pre-Islamic jahiliya.

Hadith

Examples of the ahadith used to forbid riba al-fadl—many from Sahih Bukhari:

Narrated Abu: We used to be given mixed dates (from the booty) and used to sell (barter) two Sas (of those dates) for one Sa (of good dates). The Prophet said (to us), "No (bartering of) two Sas for one Sa nor two Dirhams for one Dirham is permissible", (as that is a kind of usury). (Sahih al-Bukhari, 3:34:294)

Narrated 'Umar bin Al-Khattab: God's Apostle said, "The bartering of gold for silver is riba, (usury), except if it is from hand to hand and equal in amount, and wheat grain for wheat grain is usury except if it is from hand to hand and equal in amount, and dates for dates is usury except if it is from hand to hand and equal in amount, and barley for barley is usury except if it is from hand to hand and equal in amount". (Sahih al-Bukhari, 3:34:344)

Narrated Ibn 'Umar: Muhammad said, "The selling of wheat for wheat is riba (usury) except if it is handed from hand to hand and equal in amount. Similarly the selling of barley for barley, is Riba except if it is from hand to hand and equal in amount, and dates for dates is usury except if it is from hand to hand and equal in amount. (Sahih al-Bukhari, 3:34:379)

Narrated AbuHurayrah: Muhammad said: If anyone makes two transactions combined in one bargain, he should have the lesser of the two or it will involve usury. (Sunan Abu Daud)

Raqiub Zaman notes that when riba is described in hadith literature, it is "in the context of sales", with "no mention of loan (qard) or debt (dayan)", suggesting the hadith support riba al-fadl and the restrictions on the bartering of dates, wheat, gold, etc., not riba an-nasiya.

Application

Islamic jurists have traditionally interpreted the admonition of the ahadith to mean that if one amount of commodity is traded for the same kind of commodity then the two items exchanged must be of the same quantity, ignoring the quality of the commodity or the labor added to it. (Although there is some question of why anyone would ever exchange equal quantities of the same quality commodity ("like for like") that the ahadith seems to call for—for example 100 kilograms of wheat for 100 kg of wheat.) If, for example, a jeweler is paid in gold bullion for a gold ornament or piece of jewelry, and charges any money for their labor, they are guilty of riba al-fadl. If someone has a 100 grams of 24 karat gold and needs 100 grams of 18 karat gold (and can only get it by trade with their gold), they must trade their 100 grams for an equal amount of that less pure gold or commit riba al-fadl.

All the schools of Islamic jurisprudence (fiqh) accept this prohibition. In more recent times, the International Institute of Islamic Economics 1999 Blueprint of Islamic financial system including strategy for elimination of riba, declared riba al-fadl forbidden under Islamic law, defining it as exchange transactions of the `same general kind` where there are `qualitative differences`. The Concise Dictionary of Islamic Terms (1979) also states that riba al-fadl is one of two kinds of riba which are "strictly forbidden by the laws of Islam".

While all the schools of fiqh agree with the prohibition they do not agree over its rationale or whether it is restricted to the six commodities mentioned in ahadith—gold, silver, wheat, barley, date, salt—as the ahadith do not say "whether or not other commodities will assume the same status". Imam Abu Hanifa, of the Sunni Hanafi school of fiqh believed that the six commodities shared the common feature of being able to be weighed or measured, so that other commodities sold by weighing or measuring were subject to the same rule. Imam Al-Shafi‘i, of the Shafi'i school of fiqh, was of the opinion that their salient feature was that they were either eatables or were used as a universal legal tender. Thus all eatables and universal legal tenders were subject to riba al-fadl according to Al-Shafi‘i. For Imam Malik ibn Anas of the Maliki school the common feature of the six was that they were either food items or could be stored (i.e. were non-perishable). In his school of jurisprudence only food items or storable items are included in this category. This disagreement is the part of "Rashidun Caliph" Umar's lament that Muhammad did not explain the prohibition more clearly according to Taqi Usmani.

Criticism

Critics of this interpretation include activist Khalid Zaheer and economists M.A. Khan and Muhammad Omar Farooq. Zaheer believes that "the literature on Islamic Finance and Economics is presenting very strange applications of the concept of riba al-fadl, which are ... being applied in areas of business and finance where their application was never intended." He notes that some scholars "openly" admit they do not understand the logic of the ban on Riba al-Fadl.

Khan and Farooq ask why anyone would ever exchange equal quantities of the same quality commodity ("like for like") at the same time—for example 100 kilograms of wheat for 100 kg of wheat—in a riba-free transaction called for by quoted ahadith. Or how "divine law" could prescribe that a jeweller "who has spent his time and effort to convert gold into jewelery" not be compensated? He also notes that the authors of the IIIE blueprint have no objection to traders selling higher purity/quality commodity for cash and using the proceeds to buying more less purity/quality commodity, and wonders what would be accomplished by such "an ineffective and roundabout method of handling a simple exchange transaction!"

There are also questions of scripture about riba al-fadl. Farooq notes various contradictions and discrepancies in hadith on riba al-fadl. Both Farooq and Khan quote a well-known hadith by Usama bin Zayd stated that

• "there is no riba except in nasi'ah (delay)".

Farooq cites another

• "There is no riba in hand-to-hand [spot] transactions." He quotes another scholar (Iqbal Ahmad Khan Suhail) who believes the ahadith "demolish the self-invented castle of riba al-fadl". Khan also believes the hadith indicate that riba in a spot exchange is "ruled out".

Abdullah Saeed complains that each school of Islamic jurisprudence ignored "rationale/wisdom" (hikmah) and arrived at a legal "cause" (`illa) for riba "which had nothing to do with the circumstances of the transaction, the parties thereto, or the importance of the commodity to the survival of society."

Rationale

According to Abdullah Saeed, "the intended meaning" of the ahadith concerning riba al-fadl "was not very clear even to many jurists", who nonetheless believed the prohibition "was to be observed and complied with ... without probing into the reasons for the prohibition." Other scholars have probed. Ibn Rushd stated that "what is targeted by the prohibition of riba is the excessive inequity it entails". Taqi Usmani asserts that Riba al-fadl was developed by Muhammad after his ban on riba to avoid "certain barter transactions might lead the people to indulge in Riba", picking out commodities that were "a medium of exchange like money".

Iqbal Suhail believes trading lesser quality foodstuffs for better quality and less quantity was forbidden because the frugality and austerity of Muhammad was offended by something like the spending resources "for the sake of gratification of the palate." Others believe riba al-fadl makes little sense as a prohibited sin but does as a sort of consumer advice. Mohammed Fadel (of the faculty of law, University of Toronto) calls it a ‘prudential regulation’. Farooq suggest it may have arisen to warn Muslims that barter is usually less profitable than buying and selling separately. Khan argues that the prohibition against riba al-fadl comes not from any clear understanding of the ahadith but from an attempt to find a plausible explanation "to rationalize the ambiguity in the text".

See also

• Cleansing of the Temple
• Islamic bank
• Loans and interest in Judaism
• Shariah investments
• Usury
• Vix pervenit
• Zakat

References

Books and articles

• Ahmad, Abu Umar Faruq; Hassan, M. Kabir (6 March 2014). "RIBA AND ISLAMIC BANKING". Journal of Islamic Economics, Banking and Finance. Retrieved 26 October 2016.
• Badr, Gamal M. (Spring 1989). "To the Editor". The American Journal of Comparative Law. 37 (2). American Society of Comparative Law: 424–425. doi:10.2307/840180. JSTOR 840180.
• Farooq, Mohammad Omar (December 27, 2009). "Riba, Interest and Six Hadiths: Do We Have a Definition or a Conundrum?". Review of Islamic Economics. 13 (1): 105–141. Retrieved 26 March 2015.
• Farooq, Mohammad Omar (November 2005). "The Riba-Interest Equation and Islam: Re-examination of the Traditional Arguments" (PDF). Global Journal of Finance and Economics. 6 (2): 99–111, September 2009. Retrieved 16 September 2016.
• Khan, Muhammad Akram (2013). What Is Wrong with Islamic Economics?: Analysing the Present State and Future Agenda. Edward Elgar Publishing. Retrieved 26 March 2015.
• Kuran, Timur (2004). Islam and Mammon: The Economic Predicaments of Islamism. Princeton University Press. Retrieved 25 March 2015.
• Kuran, Timur (2011). The Long Divergence: How Islamic Law Held Back the Middle East. Princeton University Press. Retrieved 30 March 2015.
• Nomani, Farhad (2002). "The Interpretative Debate of the Classical Islamic Jurists on Riba (Usury)". Loyola University. Retrieved 1 November 2016.
• al-Qaradawi, Yusuf. The Lawful and the Prohibited in Islam (PDF). al-Falah Foundation. pp. 262–268. Retrieved 20 September 2016.
• Saeed, Abdullah (1999) [1996]. Islamic Banking and Interest: A Study of the Prohibition of Riba and Its Contemporary Interpretation. Brill. Retrieved 26 January 2015.
• Siddiqi, Mohammad Nejatullah (2004). RIBA, BANK INTEREST AND THE RATIONALE OF ITS PROHIBITION (PDF). JEDDAH - SAUDI ARABIA: ISLAMIC DEVELOPMENT BANK ISLAMIC RESEARCH AND TRAINING INSTITUTE. Retrieved 27 March 2015.
• Siddiqi, Mohammad Nejatullah (2007). Muslim Economic Thinking: A Survey Of Contemporary Literature (PDF). Leicester: The Islamic Foundation.
• Usmani, Muhammad Taqi (December 1999). The Historic Judgment on Interest Delivered in the Supreme Court of Pakistan (PDF). Karachi, Pakistan: albalagh.net.
• Usmani, Muhammad Taqi (1998). An Introduction to Islamic Finance (PDF). Kazakstan.{{cite book}}: CS1 maint: location missing publisher (link)