In a world enslaved by a monetary system that is making the rich richer and driving the poor further into abject poverty, it is more important than ever to understand the concept of Riba in Islam. The term Riba is generally is used as a byword for usury but it has a much broader meaning as will be explained in this article. The prohibition of Riba in principal seeks to undo all unfair/unethical financial practices.
Concept of Riba in Islam
In Islam, the subject of Riba has been thoroughly explained both in the Quran and by the prophet Mohammad (PBUH) himself through his teachings. Such has been the emphasis on avoiding Riba that the very last verses revealed to the holy prophet (PBUH) deal with the very subject (Chapter 2: 275-281).
In this article concept of Riba is explained using notes from distinguished scholars. Sheikh Imran Hosein, because of his diverse education both in Islamic theology and international monetary system is considered an authority in this field. His views and comparative analysis have been complied here in. Shiekh Imran Hosein, through his lectures and his books, he has unpacked the concept of Riba very methodically and described it in terms that are comprehensible to the modern mind.
Quran on Riba
Shiekh Imran Hosein explains that in the Quran, Riba has was first mentioned during the Meccan period of the prophet’s life (PBUH). In the early verses, Riba was contrasted against charity. The Quran describes that Riba will have no reward, no recompense in the eyes of God while charity will be multiplied several folds (Chapter 30-39).
Imran Hosein emphasizes that to clarify ones concept of Riba, one must firstly recognize the contrast between Riba and charity as mentioned in the verse of Quran. He says that the difference lies in the spirit of riba and charity. A loan given out on Riba seeks to take more than it gives. Whereas charity seeks to give rather than take.
Further in the Quran it has been explicitly mentioned that a loan that eventually results in the debtor returning double or multiple times the principal amount is forbidden. This has led many Muslims to believe that only loans with compound interest or with very high interest rates are forbidden. Riba however is not limited to exorbitant returns as will be further explained. According to Sheikh Imran Hosein, long term or short term, low or high interest rates, they all fall in the category of Riba. He goes on to say that low interest rates only slow down the speed of declining fortunes of someone in need.
Later in Quran, Riba is contrasted against trade. The Quran says that Riba and business are separate and goes on to describe the ill fate of the people who mix the two and declare them to be the same.
Imran Hosein expands this concept as says that in business there is always a risk while Riba based financial institutions offer products which are pitched as Risk free investment.
The fixed interest investments products completely insulate one party from risk while the other party is totally exposed to it. Or in other words, the burden of risk lies with one party alone, the borrower. Such investments therefore also fall in the category or Riba.
The second way a Riba based business different to an ethical business is because of the link between investments return and time. A system where investment/loan perpetually grows with time without any input or effort by the investor will also fall in the category of Riba. The investments that grow just with time make their extra money through loans that are received back with interest. In the last verses of the Quran (verse 280), it has been mentioned that hardship should be eased on the debtor by postponing the collection of instalments. Thus through this verse the Quran openly decouples the link between time and money.
Imran Hosein clarifies that any business that will tie time with money will eventually financially rip off the party that is already disadvantaged. Thus by its very nature its exploitative Furthermore, this practice in spirit goes against the just entitlement of rewards as ordained by the Almighty. The Quran says “People are entitled to only that what they strive for” (Chapter 53 Verse 39). A system that seeks to perpetually reward those in the upper strata without any effort falls in the category of Riba.
Money must circulate through the system. This creates a level playing field where rich are at equal risk of a turnaround in their fortunes as poor. In today’s financial system, money largely travels in one direction and assets only pile up only on one end of the spectrum.
Hadeeth on Riba
Having looked at Quran, it is important to look at a few hadeeth regarding Riba to further clarify our understanding. By only looking at the edifice built on FIAT currency system, it will be difficult to grasp he concept of Riba holistically. Therefore a few fundamentals principals regarding ethical monetary system must be established first before delving deeper into the concept. The first hadeeth presented herein, clarifies the concept of money in Islam.
It has been narrated by Ubada ibn al-Samit: The prophet, said: “Gold for Gold, Silver for Silver Wheat for Wheat, barley for barley, dates for dates and salt for salt-like for like, equal for equal and hand to hand, if the commodities differ then you may sell as you wish provided that the exchange is hand to hand” (Sahih Mulsim, Tirmidhi)
The following conclusions can be drawn from this hadeeth
- Money in Islam can be any of the six commodities mentioned ( Gold, Silver, wheat, barley, dates, salt )
- Commodities used as money have an intrinsic value
- Money cannot be printed out of thin air (like for like, equal measure)
- Trading must be based on spot prices not speculative prices
The second hadeeth (copied below) points out how not to use money that will result in Riba
It has been narrated from Abu’ Said: Bilal brought to the Prophet, some barni (good quality) dates whereupon the prophet asked him where these were from. Bilal replied, “I had some inferior quality dates which I exchanged for these- two for one” The prophet said, “Oh no, this is exactly Riba. Do not do so, but when you wish to buy, sell the inferior quality dates against something (money/cash) and then buy the better dates with the price you receive” (Sahih Muslim, Musnad Ahmad)
The lesson drawn from this hadeeth is that if two similar money commodities are to be exchanged than the exchange rate should be determined by the market price rather than the price privately settled by two parties.
Another hadeeth that guides against speculative trading and some aspects of hedging practice is as follows:
It has been narrated from Usamah ibn Zyad: The prophet said: “There is no Riba in hand to hand (spot) transactions (Sahih Muslim)”.
There are also other hadeeth that inform us that any transaction that is based on deceptions will also be categorized as Riba. And the prophet Mohammad (PBUH) also asked his followers to keep favours and loans separate. The meddling of the two builds up in expectation of concessions.
The way forward
This leads us to a big question. With the constraints and limits because of the prohibition of Riba, what is the incentive for a lender to lend? Given that the lender cannot accrue anything other than principal sum and that too over indefinite time?
The scholar Javed Ghamidi has tried to solve this conundrum. He says that when it comes to any loaned consumable items or money, asking for anything above the principal amount will be riba.
In the light of this statement, it is beneficial to revisit the concept of money in Islam. As noted earlier money is always an item that is consumable. And a differentiation has to be made between items that are consumable and not “usable”. The term usable herein imply any items that may depreciate with time but will not perish with use. Consumable items may depreciate, appreciate or retains their value (Car, house, machine).
A dollar note on the other hand that was saved in 1960 is not even worth half its value in the present time.
This definition of money has been picked up by Javed Ghamdi who further explains that the prohibition Riba is applicable on “money” not on other “usable” commodities. “If it was” he adds “than it would be difficult to rent out anything”. He goes on to say that for instance if a bank buys a house for you and gives you at a mortgage, it is serving two purposes. It’s providing you residence and you are accruing ownership with your instalments.
Therefore to sum up, if a bank loans out consumable money, it should not charge riba (interest). If a bank or a financial institution buys you a house, car, or a machinery it can lease you out with an option of ownership, than it would not fall in the category of Riba. It should be noted that in the second model, if a person has no means to pay for the usable item, the accrued ownership can be returned back to the bank. To reiterate, there is no Riba on usable, but there is on consumables.
If we try to intersect the views of both scholars we will find that in a micro-market economy, its easier to avoid Riba. In macro economy it becomes much more difficult.
In Fiat currency system, where there is no money with intrinsic value and the currency itself is loaned out on interest to the governments by privately owned banks and the size of global economy is the scale of trillion dollars, the avoidance of Riba in a is nearly impossible.
We are living in times where the slogan “time is money” are embedded in our consciousness from an early age. It will therefore take time to grasp the concept and think about financial institutions in a completely different paradigm in contrast to the one which we are used too. We must meanwhile take time and re-educate ourselves of the concept of Riba in Islam. We must make every effort to avoid it and help humanity get out of this viscous circle.