Riba (, or , ) is an Arabic word used in Islamic law and roughly translated as "usury": unjust, exploitative gains made in trade or business (especially banking). Riba is mentioned and condemned in several different verses in the Qur'an (3:130, 4:161, 30:39, and the commonly referenced 2:275-2:280). It is also mentioned in many hadith (reports of the life of Muhammad).
While Muslims agree that riba is prohibited, not all agree on its precise definition). The term is often used to refer to interest charged on loans, and the widespread belief among Muslims that all loan or bank interest is riba forms the basis of the $2 trillion Islamic banking industry. However, not all Islamic scholars have equated riba with all forms of interest; nor do they agree on whether riba is a major sin or simply discouraged (makruh), the simultaneous exchange of unequal quantities or qualities of some commodity—known as riba al-fadl.
Etymology and definitions
The word riba 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 defining riba in Islam was noted by early Islamic jurists such as Ibn Majah and Ibn Kathir, who quotes the second Rashidun Caliph Umar ibn al-Khattab:
<blockquote>"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."|group=Note </blockquote>
Taqi Usmani—"one of the leading" modern day "religious experts on Islamic finance"—disagrees, arguing that scripture concerning riba could not possibly be ambiguous (mutashabihat) because God would not condemn a practice without revealing its "correct nature" to Muslims.
- Unequal exchange. In addition to loan interest, this can include the exchange of nonequivalent quantities of goods (riba al-fadl) or unequal exposure to risk (Olivier Roy).
- All forms of interest, "any excess on the principal sum of loan", i.e. any and all interest, irrespective of how much is lent, whether the borrower is rich or poor, or the use of the loan for investment or for consumption. Some translations of verses of the Quran substitute the word "interest" for riba or "usury". This is the "orthodox" or "conservative" view of classical jurists, as well as revivalists such as Abul A'la Maududi.
Some sources (John Esposito, Cyril Glasse, Ludwig W. Adamec) emphasize a dichotomy in the prohibition of riba, with classical scholars and orthodox revivalists interpreting its meaning broadly and strictly, and others using a narrower definition which is more easily evaded in modern practice.
- Broad definition of interest: "Prohibiting any loan contract that specifies a fixed return to the lender" on the grounds that it provides "unearned profit" 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 (John Esposito).
- Narrower definition in most Muslim-majority countries: riba means "excessive interest" Usmani believes both of these definitions are incorrect, and that in reality a number of transactions where "an increased amount was charged on the principal amount of a debt" were in vogue at this time and can be considered riba al-jahiliya. Other orthodox scholars agree and state riba al-jahiliya, riba an-nasiya, riba ad-duyun, riba al-Quran, riba al-qardh are all names for one of the two types of riba (the second type being riba al-fadl).
- Riba an-nasiya: the excess accruing from a loan transaction. Riba an-nasiya is the riba on a credit transaction, when two quantities of items 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, also riba al-sunna: excess accruing in a sale or barter transaction, (its definition of riba Nasi'ah seems different from others):
{| class="wikitable"
|+ Types of Riba
! Types of riba
! Description
! Sub-type of riba
! Description
|-
! Row header 1 rowspan="2"|Riba Duyun
|colspan="1" rowspan="2"|Unjustified increment in money lent whether in kind or cash over and above the principal amount.
| Riba Qard ||Increase (interest) on the principal sum of the loan is agreed upon at the point of contract
|-
| Riba Jahiliyyah
| Increase levied on the borrower for late repayment or failure to repay the financial loan
|-
! Row header 2 rowspan="2"|Riba Buyu
| colspan="1" rowspan="2"|Occurs in trading and exchange transactions, in which unequal exchange of certain commodities (gold, silver, dates, etc.) of same kind and same basis.
| Riba Fadl
| Due to unequal amount/quantity
|-
| Riba Nasi'ah
| Due to extension of time of delivery
|}
History
Riba al-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".</blockquote>
Orthodox Islamic scholar and Islamic banking advocate Taqi Usmani disagrees. In describing "riba in the days of Jahiliyya", he makes no mention of debts being doubled, but states that riba "had different forms" and that "the common feature of all these transactions is that an increased amount was charged on the principal amount of a debt".
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. is credited with establishing the orthodox definition of riba—stipulating that it was excess payment "in a loan or debt" (i.e. interest on debt). M. A. Khan argues that attempts to ban interest resulted in either the development of black markets and higher prices for "interest-bearing credit", which "defeat[ed] the very purpose for which interest was banned"; or in various "subterfuges to camouflage interest so as to bypass the legal sanctions".
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 shipping them to foreign lands. Feisal Khan argues that "all pre-modern, and not just Muslim societies" banned interest on loans, using a ban as "a simple and effective risk-mitigation mechanism for small borrowers that cannot afford the down-side risk inherent in financial transactions". 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 it 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).
With modernity and economic development, higher incomes and more complex mechanisms such as insurance eliminated the need for the ban. This, rather than religious backsliding, explains the lack of interest in the ban among the contemporary Christian and Jewish counterparts of the Islamic ulema (according to Feisal Khan).
(According to two other sources—International Business Publications and Egyptian Grand Mufti Ali Gomaa
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 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 ..."
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.
Critic of the all-interest-is-riba formulation, M.O.Farooq, makes a number of criticisms of logic employed using ahadith to establish the connection.
- When it comes to "people's life, honor and property" special care should be taken formulating "laws, codes or dogmas" (such as forbidding interest on loans) in terms of scriptural backing. For example, even high quality sahih ahadith provide "probabilistic" and not "certain knowledge" of what it was that Muhammad taught. (Only a very few ahadith provide "certain" knowledge, and none of them address riba.)
Farooq cites another critic, Abdullah Saeed, who complains that the schools of Islamic jurisprudence have ignored "rationale/wisdom" (hikmah) and arrived at a legal "cause" (`illa) to determine what was 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" approved by orthodox jurists as lacking riba.
A similar argument in favor of the objectives rather than means is made by Mahmud El-Gamal. In favor of making analysis of istislah (public interest) rather than qiyas, (i.e., using analogy to apply injunctions to new circumstances) "the final arbiter in the area of financial transactions", Gamal quotes the twentieth-century Azhari jurist and legal theorist Abdul-Wahhab Khallaf: <blockquote>"Benefit analysis and other legal proofs may lead to similar or different rulings. ... In this regard, maximizing net benefit is the objective of the law for which rulings were established. Other legal proofs are means to attaining that legal end [of maximizing net benefits], and objectives should always have priority over means."</blockquote> El-Gamal quotes 14th century Maliki scholar Al-Shatibi stating that the legal ends of Islamic law "are the benefits intended by the law. Thus, one who keeps legal form while squandering its substance does not follow the law."
El-Gamal also finds it curious that classical jurists consider urf (or adherence to convention or customary practice) an important "legal consideration" (for example Hanafi jurist Al-Sarakhsi writes "establishment [of rights, etc.] by customary practice is akin to establishment by canonical texts"), and one that is not fixed but changes as customary practice changes. But when it come to banking, contemporary orthodox scholars do not consider "customary practices" to constitute a "legal consideration".
;Future
Mohammad Omar Farooq argues the prevailing doctrine of interest-equals-riba may eventually follow other such "long-standing orthodox" but no longer accepted practices such as hadd capital punishment for apostasy from Islam, or that "triple talaq" (i.e. by a husband divorcing his wife by declaiming "talaq" aloud three times).
Issues in interest as riba an-nasiya
Opposing sides
Most Muslims and most "non-Muslim observers of the Islamic world" believe that interest on loans (also on bonds, bank deposits etc.) is forbidden by Islam. (Such loans—or banks that make them—are sometimes referred to as ribawi, i.e. carrying riba.) This "orthodox" position
is 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),
Its importance among Islamists/revivalist Muslims is reflected in the size of the Islamic financial industry built on the basis of the orthodox position (approximately $2 trillion as of 2017), and in expressions such as the uproar that temporarily shutdown the Pakistan parliament in 2004 when a Member of Parliament (MP) had the temerity to quote an Egyptian Islamic scholar decreeing that bank interest was not un-Islamic. (In response—after the parliament was reopened—an Islamist MP stated that no member of parliament had the right to question 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 <blockquote>"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."</blockquote>
However, not all Muslims agree with the "orthodox" formulation that any and all interest—including contemporary "bank interest" (as opposed to interest charged in predatory, unfair or abusive lending)—constitutes riba. The "thin ranks" of notable contemporary non-orthodox scholars
While the minority status of non-orthodox scholars is uncontested, whether there is a consensus (ijma) in favor of orthodoxy, is. One non-orthodox economist (M.A. Khan) argues that a true consensus requires the agreement of not only most Islamic scholars but the Muslim community as a whole. Since most Muslims have failed to choose interest-free Islamic banking for most of their assets, this demonstrates (according to Khan) that they do not agree that all interest is riba.
Overview of rationale and its critics
In answer to the question, "why has God prohibited interest?", a number of arguments have been advanced by orthodox/Islamist/revivalist scholars, preachers, writers and economists. They include that (in their view)
- interest is a form of exploitation by the lender of the borrower and/or by the rich of the poor, that brings more inequality in society;
- interest should not exist because money is unproductive and charging a price for it is unfair;
- it is unjust for a lender to receive a fixed return (i.e. interest) when the profits or losses of the borrower/entrepreneur vary, and/or to gain from financial activity without risk of potential loss;
- interest is unnecessary in a contemporary economy because investment capital can be generated justly by the sharing of risks and profits between financiers and entrepreneurs (and when that is impractical other financing of commodity and product purchases); this Islamic system of banking and finance will lead to greater prosperity and more human sympathy, economic stability, efficiency, development, etc.
At the same time that orthodox analysts offer rationale for why interest is forbidden, "more than one analyst"—including medieval Quranic exegete Fakhr al-Din al-Razi Usmani writes:
<blockquote>"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 transaction", [or even that] "the philosophy of the law" [be] "visible in a particular transaction". Farooq further argues that in the real world profit, in contrast with interest, is as much exploitative, if not more. In a separate work, he illuminates the importance of rent-seeking in the modern world that is more widespread and with far greater consequence than interest. Farooq and others (e.g. Izzud-Din Pal and Yoginder Sikand) complain that the pursuit of justice has not been made the "underlying reason" in defining riba by jurists. (See above.)
Vice and corruption
Among those arguing that interest has a corrupting influence on society are Muhammad N. Siddiqi, Yusuf al-Qaradawi, medieval jurist Fakhr al-Din al-Razi, Abul A'la Maududi.
Interest "corrupts" society and "demeans and diminishes human personality" according to M.N. Siddiqi.
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, according to Yusuf al-Qaradawi. Interest brings an end of "mutual sympathy, human goodliness, and obligation", according to Imam Fakhr al-Din al Razi.
Ibn Rushd argued the rationale for prohibition relates to the possibilities of cheating that exists in riba, which is clearly visible in riba fadl.
Non-Orthodox M.O. Farooq replies by asking why Siddiqi does not even attempt to provide evidence for how charging interest leads to social and personal corruption, noting there is no connection between levels of corruption as determined by monitors such as Transparency International and the use of interest-bearing loans. Farooq answers the charge 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 in the present day many savers are retired elderly of modest means for whom it would be foolish to take risks with their life savings, and who pay for this caution with smaller returns. Another non-orthodox critic, Faisal Khan, argues that while complaints of lenders being wealthy and predatory may well have been valid in the 12th Century of al-Razi, or among the North Indian peasantry that Maududi knew (who borrowed from the bania Hindu merchants who sometimes serve as money lenders), it "is hardly an accurate description" of the effects of a "modern conventional banking/financial system".
Taqi Usmani, maintains that investors/savers desire for fixed income investments/accounts is the result of an unnatural expectation of no risk of loss, brought about by the separation of finance "from normal trade activities" in capitalist banking—normal trade activities of course resulting in losses from time to time. Once people understand this they will invest in Islamic finance.
Inequality
Among those who believe that interest bearing loans favor the rich and exploit the poor are M.U. Chapra, Taqi Usmani, Al-Qaradawi, Abul A'la Maududi, Taji al-Din and Monzer Kahf, Fakhr al-Din al-Razi, and Ghulam Ahmed Pervez.
Makkan lending (Riba al-jahiliya) involved high interest rates charged by rich money lenders to poor customers who borrowed for purposes of consumption, Muhammad Asad, Sa'id al-Najjar, Sayyid Tantawi,
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.</blockquote>
;Practicality
Economic arguments that bank interest is needed for efficient allocation of resources and economic development, also mean that it serves the public interest. Because public interest (Maslaha), is one of the bases of divine law (ranking below other sources: Quran, Sunnah, ijma (scholarly consensus) and qiyas (analogy)) this may exempt bank interest from charges of being haram and riba.
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."
Feisal Khan notes that the Islamic banking industry is under criticism not just from non-orthodox who think Islam does not call for a ban on interest, but from "ultra-orthodox" who believe it has not truly excluding all forms of interest from finance. He notes complaints about the authenticity of Islamic banking from strict Muslims (Taqi Usmani has argued that the industry has "totally" neglected the "basic philosophy", undermining its own raison d'être; and that other banks (such as the Meezan Bank and Al Baraka Bank) were "full-fledged" Islamic commercial banks who would be promoted by the state bank. Despite this "rebooting", Khan states that the new, purified, full-fledged Islamic banks are the same in "form and function" as the old Islamic banks, and that eleven years later (as of 2013), use only a minuscule amount (3%) of profit and loss sharing, and make up only about 10% of the country's banking sector.
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 silver dirhams and gold dinars 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.
Time value of money
One concept instrumental in explaining (and defending) the justice of charging interest on loans
is the time value of money—the idea that there is greater benefit in possessing money in the present rather than the future. The concept justifies the idea that later payment should be discounted and savers/investors/lenders be compensated for deferring the benefits of consumption, or—as mentioned above (see: Injustice of fixed return)—compensated for "renting out" the purchasing power of their capital, much as any rental agency providing something valuable/useful is paid rent. El-Gamal then gives as an example Mawdudi and al-Sadr. Taqi Usmani also states: "[I]n Shari'ah, there is no concept of time value of money."|group=Note
Fahim Khan of the Islamic Research and Training Institute in Saudi Arabia states that the prohibition of interest "can be considered" a "sort of a denial of time value of money". Maududi has called the difference "between the psychological values of the present and the future ... nothing but an illusion", Taqi Usmai has declared unequivocally that "in Shariah there is no concept of time value of money".
Irfan argues that the value of money diminishes very little over time because some consumption—such as eating—can only be done over time. Furthermore, discounting for time may lead to negative outcomes such as unsustainable agricultural production with planting and grazing that causes desertification and erosion, since these bad outcomes occur in the discounted future.
However, Islamic banking also calls for rewarding delayed gratification in the form of "return on investment" Critic Farooq complains that this rationalization is contradictory, and amounts to denying time value in theory while embracing it in practice, and that the accepting of the theory in practice explains the large (and successful) move of non-Islamic western banks into Islamic banking.
Islamic concept of money
Answers to the argument (of economists such as Farooq) that lenders of money are due some kind of rent-like compensation;
Orthodox scholars, such as M.U. Chapra and M.T. Usmani, have written that money can only be a "medium of exchange" and must not be treated as an "asset or commodity". Trading a commodity/asset, or paying a fee for its use is right and sensible (they argue), but trading or renting a medium of exchange is wrong, because money is "unproductive" has "no intrinsic utility".
This being the case, no return for the use of money can be justified, and explains (at least in part) why it is riba.
Usmani quotes condemnations of speculation by various Western sources
In response, M.A. Khan questions
- whether the distinction between asset and medium of exchange proceeds from a need "to prove that all types of interest are unfair",
- if there is any good way for enforcers of Islamic law to differentiate between productive trading and the speculation which is forbidden by this definition.
Reduction of debt for early payment is considered haram by the four Sunni schools of jurisprudence (Hanafi, Maliki, Shafi'i, Hanbali), but whether there is a consensus of Islamic jurists is unclear. According to Ridha Saadullah, such reductions have
<blockquote> 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. ...</blockquote>
Inflation
Whether or not compensation to lenders for the erosion of the value of the funds from inflation is allowed (and how to provide that compensation in a way that is not considered riba), has also been called a problem "vexing" Islamic scholars, since finance for businesses will not be forthcoming if a lender loses money by lending.
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."
However, many scholars believe indexing is a type of riba] and that it encourages inflation. Others state that using "interest to neutralise inflation would be 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 interest that accumulates while the loan is delinquent, the price for credit payments can "never be increased" no matter how late the lender/buyer is in repaying (according to Usmani) because late fees are payment "against money", which violates the principal that credit payments must be "against commodity and not against money". According to Ibrahim Warde,
<blockquote>Islamic banks face a serious problem with late payments, not to speak of outright defaults, since some people take advantage of every dilatory 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` It is also considered (at least by some sources) a form of riba prohibited by the Sunnah rather than the Quran.