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Riba (Arabic: ربا, [rɪbæː]) means one of the senses of "usury" . Riba is forbidden in Islamic economic jurisprudence fiqh and considered as a major sin. Simply, unjust gains in trade or business, generally through exploitation.
There are two types of riba discussed by Islamic jurists: an increase in capital without any services provided and risk taking, which is prohibited by the Qur'an, and that prohibited in the Sunnah which comprises commodity exchanges in unequal quantities.
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Riba was forbidden in the Medinan society of Muhammad, as it had been in the medieval Christian world. Historically, the consensus of Muslim jurists understood that any loan which involved an increase in repayments was forbidden, and as such, the Islamic state prohibited it. This prohibition was reconsidered with the advent of European influence during the Age of Enlightenment.
Riba is considered amongst the Seven Heinous Sins (Al-Saba al-Mubiqat - السَبعَ الموبِقاتِ), namely:[1]
The Qur'an states:[2]
| “ | يَا أَيُّهَا الَّذِينَ آمَنُواْ لاَ تَأْكُلُواْ الرِّبَا أَضْعَافًا مُّضَاعَفَةً وَاتَّقُواْ اللّهَ لَعَلَّكُمْ تُفْلِحُونَ | ” |
3:130 O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful.
| “ | وَأَحَلَّ اللّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا | ” |
2:275 Allah has permitted trade and has forbidden interest
Mohammad said in his farewell sermon: "God has forbidden you to take Riba, therefore all riba obligation shall henceforth be waived. Your capital, however, is yours to keep. You will neither inflict nor suffer inequity. God has judged that there shall be no riba and that all the riba due to `Abbas ibn `Abd al Muttalib shall henceforth be waived.".[3]
The Qur'an explicitly prohibits Riba, and since the Qur'an is an undisputed source of guidance for Muslims, all Muslim authorities unanimously agree on prohibition of Riba. There is no difference of opinion between any school of thought on the prohibition of Riba in Islamic Shariah.
The Qur'an mentions that the person who deals with Riba (ربا) will stand (on judgement day) as one who is beaten by Satan into insanity.[4] Here Qur'an makes it clear that "trade" and "riba" are not the same, and that God forbade "riba" and allowed "trade".[5] It further states that whoever accepts the guidance of God must immediately stop dealing in Riba, and those who return to Riba after God’s guidance has reached are dwellers in fire, because God destroys "Riba" and he will reward those who give to charity.
Mohammad cursed the one who deals with Riba. From Jabir: Mohammad cursed the receiver and the payer of riba, the one who records it and the two witnesses to the transaction and said: "They are all alike [in guilt]." [Sahih al-Muslim, Sahih Al-Bukhari, Tirmidhi, Ibn Majah, Bahiqi and Musnad Ahmad]
Islamic Shariah considers Riba as a tool of oppression and a means to unjustly take others' money[6] by exploiting their needs and circumstances. Hence it forbids a Riba based system altogether and promotes Charity as an alternative. Therefore, Mohammad said: "God has judged that there shall be no riba" [Last Sermon]
The crimes of dealing in Riba are so serious that God has declared war against those who deal in Riba.[7] Mohammad has cursed anyone who deals with Riba, the one who takes it, the one who pays it and the one who records it, as their sins are considered equal under the Quran.[8]
Riba is considered to be a greater sin, for Muslims, than that of eating pork or drinking alcohol. Mohammad declared the practice of Riba worse than adultery: worse than "to a man committing adultery with his own mother".[9]
The word riba was linguistically used by the Arabs prior to Islam to refer to an increase. In commercial practice, it referred to the increase on loans, namely, interest.
The definition of riba in classical Islamic jurisprudence was "surplus value without counterpart." When currencies of base metal were first introduced in the Islamic world, paying a debt in a higher number of units of this fiat money was not considered riba; jurists were concerned with the real value of money (determined by weight only) rather than its numerical value. For example, it was acceptable for a loan of 1000 gold dinars to be paid back as 1050 dinars of equal aggregate weight of gold (i.e., the value in terms of weight had to be same because all makes of coins did not carry exactly similar weight) - therefore having the same real value.
The Qur'an deals with riba in 12 verses, the word appearing eight times in total, three times in 2:275, and once in 2:276, 2:278, 3:130, 4:161 and 30:39.[10]
The Mekkan verse in Surah al-Rum was the first to be revealed on the topic: And whatever Riba you give so that it may increase in the wealth of the people, it does not increase with Allah (Quran 30:39)
The others are Medinan verses: And because of their charging Riba while they were prohibited from it (Quran 4:161) Those who believe do not eat up Riba doubled and redoubled (Quran 3:130)
Culminating with the verses in Surah Baqarah: Those who benefit from interest shall be raised like those who have been driven to madness by the touch of the Devil; this is because they say: "Trade is like interest" while God has permitted trade and forbidden interest…God deprives interest of all blessings but blesses charity…O believers, fear God, and give up the interest that remains outstanding if you are believers. If you do not do so, then be sure of being at war with God and His messenger. But, if you repent, you can have your principal... (Quran 2:275-280)
The jurists do not consider the first two verses as clear prohibitive verses on the matter, whereas the latter two have been understood to prohibit Muslims from riba.
Tabari quotes a number of Tabi’een who state the verse from Surah al-Rum refers to a gift whereas al-Jawzi quotes Hasan al-Basri as stating it refers to riba.[11] Either way, there is insufficient indication from this verse that riba is prohibited, if it does indeed refer to riba.
The second verse refers to the Jews and their taking of riba, which leaves it unclear if such a prohibition applies to the Muslims.
The next verse is seen by many as prohibiting riba, including Ibn Hajar al-Asqalani.[12] However it appears that recourse to some traditions relating to Amr ibn Aqyash are required for the prohibition as the verse itself could be interpreted as expressing a preference against interest.
The verses from Surah Baqarah are seen as categorically forbidding riba. The backdrop to these verses was the dispute between Banu Thaqif and Banu Amr ibn al-Mughirah over riba due on loans between them. As such, the jurists historically agreed on the prohibition of riba from these verses and termed it riba al-nasia, distinguishing it from the interest in exchanging like goods in different quantities, mentioned in a number of narrations, riba al-fadl.
As such, some jurists saw riba forbidden early in Mecca, some in the year 2 AH and some after the opening of Mecca, but the majority agreed on its prohibition.
Some of the modern jurists, like Abduh, Rashid Rida, Shaltut, Sir Syed Ahmed, Fazl al-Rahman, Tantawi and Qardawi have tried to legitimize bank interest.[13] The earlier amongst them legitimized it for awqaf and state investment schemes during the late period of the Ottoman rule. They were the first to introduce the notion that riba al-nasia was permitted. Those that followed them remained minority voices whilst the vast majority of modern jurists prohibit it also. The modernists proposed a number of legal arguments that have been heavily criticized for using false legal reasoning, mixing hikma and illah, selective historical readings of the commercial contracts at the time of Muhammad, and misapplication of principles (e.g., mafhum al-mukhalifah). They also advanced non-legal rational arguments such as the necessity of modern finance, necessary for efficient allocation of resources, commercial interest not being the riba prohibited in Islam, no violation of justice or exploitation these days and interest rates are not very high to name but a few.[14] Most of these arguments have been criticized by modern writers, including Siddiqi, Zarqa, Khan & Mirakhor and Chapra, a good case in point being the published Supreme Court of Pakistan Judgement on the matter.[15]
As an exchangeable term with riba, interest is defined by Ismail Ozsoy, professor of economics in Fatih University, Istanbul, as "an unearned or unequally distributed income". Riba or interest is unearned when the realized income that is earned out of the loan is less than the interest rate, and it is unequally distributed income when the realized income is higher than planned.
Ozsoy argues that the main characteristic of interest is that either the borrower or the lender would absolutely and inevitably be subjected to a loss and an injustice in any case, for its rate is fixed at the very beginning, although it is impossible to predict the outcome of the business at which the loan is used, profit or loss, or how much either would be. Thus, it can be identified with an absolute injustice for either side of the transaction. It does not matter whether the interest rate is high or low, and whether it is called interest or usury, because the different kinds of interest or different rates change only the address, or the direction, of the injustice; it is sometimes the payer and sometimes the receiver of interest who is exposed to this injustice and/or financial loss.
Ozsoy bases his argument about the unfairness of interest on the Quranic verses: "O you who believe! fear Allah and give up what remains of your demand for interest, if you are indeed believers. If you do it not, take notice of war from Allah and His Messenger: but if you repent you shall have your capital sums; deal not unjustly and ye shall not be dealt with unjustly" (Baqara, 2:278-279).[16]
Ozsoy argues that injustice and unequal distribution of income is an indispensable nature of interest as well as usury, which is considered to be an excessive rate of interest. As a matter of fact, while any high rate of interest may expose the borrower to a financial loss in hard economic conditions, any low rate may expose the lender to a loss in favourable economic conditions where return on capital is high. This case reveals that there is not any acceptable rate of interest, low or high, from the standpoint of the equitable distribution of income. That characteristic of interest arises from the fact that its rate is predetermined despite the impossibility for mankind of predicting whether or not a profit will be made, and even if, how much it will be.
Ozsoy compares the interest mechanism to a two-bladed saw, or a knife, that cuts on both sides, such that either the borrower or the lender must pay more than they received—one or the other side is unavoidably injured by the interest mechanism.
Interest is the income earned by the borrowed financial capital regardless it is in the production process or not. Interest is the allocation, to the capital owner, of an unearned, undeserved, unborn, unavailable and imaginary income that might be attained without producing anything and without contributing any value to the revenue of the society. It imposes all the risks on the debtor directly and on the society indirectly but not on the lender although it is directly related to him/her.[17] Interest mechanism prevents the fair distribution of positive or negative outcomes of economic activities among the lender and borrower and worsens the income distribution. This occurs either by providing the capital owner a certain and fixed percentage of earning in any case regardless of the negative outcome of the business, or by limiting his earning with only a predetermined amount of return in case the borrower entrepreneur earns considerably high income out of his/her financial capital.[18]
The main reason advocated by Siddiqi and Ganameh as to the rationale of prohibition is that it is oppression involving exploitation. In matters of consumption loans, it is necessary that those who have wealth should assist those without, and in productive loans, a guaranteed return on capital is unjust given the uncertainty surrounding entrepreneurial profits, whereas a return to both parties as a rate of profit would be more equitable.[19]
Taji al-Din argues the reason appears to be the restriction in circulation of wealth amongst those who already have it. Lenders would not provide loans to those they believe are unable to repay, thus such wealth would be restricted to those able to service the debt. This is something forbidden categorically by the Quran and the effects on society result in the accumulation of wealth amongst those who have it and increase the divide between the rich and poor.
Mawdudi believes the cause relates to the undesirable resulting effect of an imbalance between production and consumption. This is caused by the transfer of purchasing power from those with a high propensity to consume to those with a low propensity to consume. The latter group reinvests its income in production, increasing production and decreasing consumption demand. Cost of capital results in increased prices of consumption goods, accentuating this process. Mawdudi believes this is the source of evils in the economy such as stagnation, depression, monopoly and ultimately imperialism. Interest free loans and prohibition of return on capital along with zakat, wages, profit and profit-share recreates this balance. The focus shifts to the entrepreneur whose activity becomes the only source of income along with wages, giving him the upper hand in society. Siddiqi and Ganameh cite the hadith of "income devolved on liability" in this context.[20]
Some argue that interest allows the creation of a group of people who contribute nothing to society, simply generating income from capital. This starves society of their contribution and the rationale of prohibition is to reverse this.
Ibn Rushd argued the rationale relates to the possibilities of cheating that exists in riba which is clearly visible in riba fadl.[21] Other arguments which some writers try to extract from indications on the divine texts include the rationale being corruption , unjust acquisition of property rights, destruction and a detrimental personality.
Hameedullah believes the reason is the unilateral nature of the risk born in these agreements.[22] The Islamic principle is for a reward, there must be some liability incurred – without this a return is prohibited.
The Qur'an states the following on Riba:
| “ | That they took riba, though they were forbidden and that they devoured men’s substance wrongfully – We have prepared for those among men who reject faith a grievous punishment (Quran 4:161) | ” |
| “ | Those who charge riba are in the same position as those controlled by the devil's influence. This is because they claim that riba is the same as commerce. However, God permits commerce, and prohibits riba. Thus, whoever heeds this commandment from his Lord, and refrains from riba, he may keep his past earnings, and his judgement rests with God. As for those who persist in riba, they incur Hell, wherein they abide forever (Quran 2:275) | ” |
| “ | God condemns riba, and blesses charities. God dislikes every disbeliever, guilty. Lo! those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of riba, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew. (Quran 2:276-280) | ” |
| “ | O you who believe, you shall not take riba, compounded over and over. Observe God, that you may succeed. (Quran 3:130) | ” |
| “ | And for practising riba, which was forbidden, and for consuming the people's money illicitly. We have prepared for the disbelievers among them painful retribution. (Quran 5:62) | ” |
| “ | The riba that is practised to increase some people's wealth, does not gain anything at God. But if people give to charity, seeking God's pleasure, these are the ones who receive their reward many fold. (Quran 30:39) | ” |
Riba is mentioned in a number of A hadith:
| “ | Jabir said that Muhammad cursed the accepter of usury and its payer, and one who records it, and the two witnesses, and he said: They are all equal.[23] | ” |
| “ | 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). (See Hadith No. 405).[24] | ” |
| “ | Narrated 'Umar bin Al-Khattab: Allah'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 form 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.".[25] | ” |
| “ | 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.[26] | ” |
| “ | 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.[27] | ” |
Additional ahadith exist regarding usury.[28][29]
Siddiqi suggests the key to whether the idea of prohibition of riba is effective is whether it can produce stability and efficiency in the economy, if it is conducive to growth and development and increase justice and fairness.
The model of profit-sharing on the liability side of the banking system, would make the financial system more stable than using riba. The sharing arrangements between suppliers and users of resources for producing wealth improves business cycles and stability in the economy.
With the abolition of interest, Siddiqi argues that the economic focus becomes attached to entrepreneurial activities, using the vehicle of mudarabah, resulting increasing economic activity. Although it may be thought that without interest propensity to save drops, Keynesian analysis indicates that savings are a function of income and interest is minor. As such if income can be increased, savings should increase even in the absence of the interest.
Mannan argues that interest holds back investment in production, whereas Mawdudi points out that projects that could be socially useful, generating a small return and prevented as interest rates prevent capital being utilized on such projects.
Without interest, capital can be more efficiently allocated to productive projects based on the rates of profit rather than more credit-worthy individuals. A system based on profit-sharing also harmonizes the interests between investors and entrepreneurs increasing efficiency.
Many writers see the destabilizing effects that interest has on trade cycles. The basic idea is that different interest rates and their variations allow for speculative institutions. Speculators hoard capital for the purpose of chasing higher rates, which in turn deprives the deployment of capital for productive purposes. It is argued that these vast movements of funds contribute to the fluctuations in the trade cycles and make economic planning and organization problematic.
With the absence of interest, writers argued there will be less speculation due to the absence of the interest rate and the reduced levels of debt that will result. That is not to say there will be no debt – the non-interest modes of finance allows debt, but lower levels. Decreased levels of speculation would thus result in a more stable environment.
Writers like Fazl al-Rahman say the interest rate is like price in the modern economy. It is used to regulate the demand of finance, and if the interest rate is taken to zero, we will be faced with limited supply and infinite demand. How would credit be allocated?[30]
The main response to this question by writer is that finance for productive projects can be provided through profit-share, sale on a cost-plus basis or leasing.
Writers like Siddiqi suggest a two-tier mudarabah model as the basis of a riba-free banking system. This involves the bank acting as the capital partner in a back to back mudarabah contract with the depositor on one side and the entrepreneur on the other side. This model can be supplemented by a number of fixed return models (like Ijara, Istisna, Murabaha etc.). In practice the Murabaha model is the bank’s favourite, bearing 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 in the majority, but over time the majority of accounts are now investment accounts, reflecting the confidence of depositors in the ability of banks to generate a return.[31] Islamic banking operations are successfully operating in many Muslim countries, including Pakistan, Bangladesh, Malaysia, Iran, Sudan, Turkey and Bahrain.
Insurance operations commencing in Sudan 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/damages without any interest based activities.
Third world countries are crippled with servicing foreign debt. Often countries are badly managed, and given state assets financial institutions readily lend to incompetent governments regardless of the project, knowing a guaranteed return on capital is available. This results in poor projects receiving funding, funds siphoned away with the lenders taking no responsibility or involvement in the project or the debtors – simply requiring repayments be made. The resulting debt, which has benefited the receiving society very little, leads to limited spending on developing their infrastructure and human capital as large amounts of future revenue are spent on debt servicing.
Replacement of interest bearing debt with interest free debt and public sector projects financed through profit-sharing mechanisms would alleviate many of these problems. Countries adopting interest free financing have no problems interacting with the International Monetary Fund or other international financial institutions.
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, it is however 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.
أخرج البخاري ومسلم وأبو داود والنسائي عن أبي هريرة رضي الله عنه أن رسول الله صلى الله عليه وسلم قال { اجتنبوا السبع الموبقات , قيل يا رسول الله وما هن ؟ قال الشرك بالله , والسحر , وقتل النفس التي حرم الله إلا بالحق , وأكل مال اليتيم , وأكل الربا , والتولي يوم الزحف , وقذف المحصنات الغافلات المؤمنات
أَلَا إِنَّ كُلَّ رِبًا كَانَ فِي الْجَاهِلِيَّةِ، مَوْضُوعٌ عَنْكُمْ كُلُّهُ، لَكُمْ رُؤُوسُ أَمْوَالِكُم لَا تَظْلِمُونَ وَلَاتُظْلَمُونَ، وَأَوَّلُ رِبًا مَوْضُوعٍ، رِبَا الْعَبَّاسِ بْنِ عَبْدِالْمُطَّلِبِ مَوْضُوعٌ كُلُّه