Interest, Riba in Holy Quran:
2:275 Those who devour usury will not stand except as stand one whom the Evil one by his touch Hath driven to madness. That is because they say: "Trade is like usury," but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (The offence) are companions of the Fire: They will abide therein (for ever)
2:276 Allah will deprive usury of all blessing, but will give increase for deeds of charity: For He loveth not creatures ungrateful and wicked.
2:277 Those who believe, and do deeds of righteousness, and establish regular prayers and regular charity, will have their reward with their Lord: on them shall be no fear, nor shall they grieve.
2:278 O ye who believe! Fear Allah, and give up what remains of your demand for usury, if ye are indeed believers.
2:279 If ye do it not, Take notice of war from Allah and His Messenger. But if ye turn back, ye shall have your capital sums: Deal not unjustly, and ye shall not be dealt with unjustly.
3:130 O ye who believe! Devour not usury, doubled and multiplied; but fear Allah. that ye may (really) prosper.
4:161 That they took usury, though they were forbidden; and that they devoured men's substance wrongfully;- we have prepared for those among them who reject faith a grievous punishment.
Riba, interest in Hadith:
Narrated Abu Juhaifa
The Prophet cursed the lady who practices tattooing and the one who gets herself tattooed, and one who eats (takes) Riba' (usury) and the one who gives it. And he prohibited taking the price of a dog, and themoney earned by prostitution, and cursed the makers of pictures.
Narrated Abu Juhaifa
that he had bought a slave whose profession was cupping. The Prophetforbade taking the price of blood and the price of a dog and the earnings of a prostitute, and cursed the one who took or gave (Riba') usury, and the lady who tattooed others or got herself tattooed, and the picture-maker.
Narrated Ibn 'Umar
The Prophet 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. (See Riba-Fadl in the glossary).
Narrated 'Aun bin Abu Juhaifa
My father bought a slave who practiced the profession of cupping. (My father broke the slave's instruments of cupping). I asked my father why he had done so. He replied, "The Prophet forbade the acceptance ofthe price of a dog or blood, and also forbade the profession of tattooing, getting tattooed and receiving or giving Riba, (usury), andcursed the picture-makers."
Riba (interest, usury) is primarily an economic issue in view of the fact that all religions and mythologies have prohibited, restricted, discouraged, disliked, or degraded Riba in one way or the other since the inception of human interaction. All three major revealed (Ilhami) religions i.e., Islam, Christianity, and Judaism have strongly condemned and prohibited Riba in its original versions. Later, the clerics of Jews and Christian Church abandoned the prohibition of Riba (interest, usury) that led the mankind into the economic anarchy of the present era.
Islam - the most modern revealed religion is still upholding the righteous prohibition of Riba although not in practice in any of the Islamic country at governmental level but there is immense enthusiasm for Riba-Free financial system in Muslims. The western economists have discussed the issue at large in the twentieth century and many of them are also of the view that the religious prohibition should be brought back into the conscious of the people.
As long as Riba prohibition was enforced with religious zeal, people were prosperous and the wealth distribution was not abnormal as it is today, and obviously there was not much debate on the subject but since the Riba was made legal by Judo-Christian amendments in the divine law - its destructive fallouts earthed at large. The debate started on Riba for its literal interpretation to economic implications.
It is very unfortunate to observe that, in this debate, some misconception in Muslims led to a widely circulated explanation of Riba that divide Riba in to two types, one from Quran (riba-al-nasiah) and the other from Sunnah (riba-al-fadl or riba-al-buyu) and interpreted these as "riba in debt" and "riba in trade" respectively, this division which actually is not the case; is a direct conflict with basic faith of Islam (please see "Present Islamic understanding and misconception about Riba" for details). No clear concept and universal definition of Riba exists, different views and explanations have created much confusion in Muslims in the understanding of Riba. Unless, it is not found that Why Riba was declared Haram (prohibited), the definition of Riba is not possible.
At the outset of "HazaRiba.com", I am pleased to present my work specifically on two basic subjects i.e.,
Why Riba was prohibited (declared Haram) in the divine law?
The definition of Riba
Subsequently, have discussed few complementary issues, like:
Significance of the most argued claim "riba and trade are same"
Riba and Islamic Banking
Present Islamic understanding and misconception about Riba
Solutions to deal with Riba
Before I go, some related and useful definitions for quick reference and few examples on riba are included. Please go through all the pages preferably in sequence; any feedback and/or comments are welcomed to correct/improve.
Why Riba was prohibited (declared Haram) in the divine law?
It is worth to present an example to start with the subject, a factual example from existing interest based banking methodology that is valid and current, which can be well understood by a common person. One should consider the following facts before going through the example. The facts are:
Only Banks create money.
The created money is then supplied in to the economy only in the form of loan at some specified interest.
There are no other institutions that create money other than banks.
The example - an astonishing fact
As all the banks are creating money and supplying in to the economy on interest and without any doubt all of them are practicing the same technique, so let us consider there is only one bank in our example that creates some money and supply in to the people's economy.
Suppose Bank XYZ creates Dirhams 100,000 and supplies it at an interest rate of 10% per annum to several entrepreneurs and governmental units active in the economy, remember there is no money available in the economy from any other source. The bank has taken substantial collateral or guarantee as security of its money from each borrower. See in the following diagram - the borrowers intake loan and repayment liabilities at the end of the first year:
It is very simple and clear that at the end of the first year, a combined sum of Dirhams 110,000 is due on all borrowers to repay to the loaning bank.
But the money available in the economy is only Dirhams 100,000 as the bank is only supplier of money, so from where the rest 10,000 would come that is the difference in the borrowers intake and total repayment amount...... from NOWHERE. Yes, that is right from nowhere because that money does not exist in the economy.
Look at the scene, the bank is the only supplier of money, it creates and supplies 100,000 in the economy and that is the total money available in the economy, but as per loan agreements - these borrowers collectively have to pay back 110,000. How is that possible? There is no way. Don't you believe, it is 100% like this - no less. This is cheating and criminal foul play.
So what will happen, at least one or more of these borrowers would default on their loan(s) and would loose their personal assets or belonging that they had put as security to the bank for the repayment.
The money creator has designed a mechanism that would force few of the borrowers each year to default so that bank could forfeit the security assets and gain wealth by foul play.
This is an eye opening example for those who previously had no idea about the mechanism of banks as how they operate and cause artificial shortage (scarcity) of the money in the societies. This is happening every where in this world from USA to the smallest country on this beautiful planet. This artificial scarcity of money is the root cause of people's problems from hard struggle for surviving to the loss of happiness from their lives.
In a Riba (interest) based system, people are not aware of this foul play - borrowers think that they will manage to repay the principal plus Riba (interest) as they think it would be coming from some where else, but the fact is - every borrower would be in battle with others where some borrowers have to lose in order for others to win, some would fail to pay their loans in order for others to get the sum they need to pay off the Riba (Interest). When seen in totality, the supply side is always in deficit and the liability is always in excess due to Riba (interest), the total combined supply cannot discharge the liability.
After going through the above real example, I believe, now we are close to find out why Riba was declared Haram in Quran and Sunnah.
Let us begin with the economic reasoning of WHY: The availability of each produce is limited, the liability cannot exceed the availability limit.
In any transaction, if a liability of produce "in excess" of "the produce available" is created, that extra liability would be artificial because excess quantity of produce does not exist.
This universal economic code applies to each and every type of produce; to further get in to the explanation of the rule, let us now identify what represents "the produce", "the transaction", and "extra liability":
The Produce
In its general expression "the produce" is any thing available to human beings for their use or consumption, but here specifically those produce that can be involved in a transaction, it is best to take historical standards of transactions which are based on produce like gold, silver, grains, currency etc. because throughout history all transactions are carried out in publicly acceptable produce only. These produce have served the societies as "medium of exchange", so it is more appropriate logically and historically to consider the produce as "the medium of exchange" which is again a general expression and can accommodate any other commodity/produce that may be used in a transaction.
The Transaction
In this universal economic principle, the transaction is based on a single produce and naturally it can only be a transaction of loan or exchange and nothing else. Although donations/grants also involve only one produce but that is not a transaction because a transaction means exchange of good(s) and/or service(s) either on spot or in any specified time frame involving one or more types of produce.
Extra Liability
Riba (interest, usury) is that extra liability created in excess of the produce available and that does not exist. Every liability is a demand in practice, the basic rule of economics known to every one is that to maintain economic equilibrium (stability) in the society, the supply side should be equal to the demand, if the demand is more than the supply - a shortage will occur. Creating an extra liability means creating an extra demand without increasing equal supply, this will start a never ending mechanism of perpetually increasing the shortage of that produce in the society.
Conclusion:
Riba was prohibited just to prevent the creation of "extra liability/demand" because that is fake and "does not exist" physically, this artificial "extra liability/demand" creates scarcity of the produce in the society and unjustly accumulation of the produce in few hands. Riba (interest, usury) is a mechanism and dangerous weapon that has a power to get hold of assets/properties of individuals, enterprises, and nations deceitfully. This is unfair and against the nature, so ALLAH banned Riba (interest, usury) very strictly to stop this criminal action.
Nature is the Limit in Islam; any thing not natural is prohibited, stopped, and declared illegal. The above economic reasons are the only base for the prohibition of Riba, ALLAH has allowed everything that is natural but given its strict judgment to stop any behavior, agreement, and practice that is not natural.
The definition of Riba
A forced "increase of value" in "the medium of exchange" that is loaned or swapped is Riba.
Explanation :
Below is explanation of different meaningful parts of this definition:
A forced means demanded, desired, claimed, requested, practiced, agreed etc.
Any of the above or similar words would fall under the "forced" category that define and create a liability on other party.
Increase in value means the increase in terms of value which comprises the quantity and the quality, there is no issue of the minimum or maximum increase, fixed or variable increase, just increase no matter how small or large it is and how that increase is defined.
The medium of exchange means any thing that can serve the purpose of exchange of good(s) and/or service(s) in the society at any level i.e., international, national, or local. We all know and recognize currency and gold etc. as the best examples of the medium of exchange, but still for instance in some parts of the world, agro-labour are paid in grains from the harvest they had worked upon, and that grains serve as the medium of exchange on a very localized level and certainly that would fall under the classification of "medium of exchange". Other than this, any thing would become a "medium of exchange" if the loaning party forces the borrower to pay in extra on return.
That is loaned or swapped means the same medium of exchange that was given as loan or used in the exchange. It is generally understood that exchange is "on spot" and loan is "time related" but both the transactions are based on a single produce, no increase either on spot or in a time frame is allowed because there is a definite potential of using the exchange mechanism for riba if it were only banned in loan transaction. Some people question about the sense of allowing exchange of equal quantity and quality on spot, why some one would do that? The answer is very simple, if one has a currency note of 100 and need to change it into lower denominations, what he gets must be equal to 100 in any combination of lower denominations.
Summarizing the rules for the analysis of riba in a transaction, we might conclude the following:
Riba is only present in a transaction of single produce, generally "the medium of exchange".
Riba is not necessarily time related; it can be on spot or in any time frame.
Riba is the "increase", not the "decrease".
Riba is forced; volunteer extra return from the beneficiary shall not be regarded as Riba.
Significance of the most argued claim "riba and trade are same"
A transaction is defined as the exchange of good(s) and/or service(s) either on spot or in any specified time frame and that may involve one or more types of produce.
Trade is a transaction where minimum two different types of produce are involved; where one produce is always "the medium of exchange" and the other may be any type of goods.
Barter is a transaction where minimum two types of produce are involved in the absence of "the medium of exchange", in a barter transaction; at least two types of goods are involved.
In a Service transaction, again there are two produce involved, one might be "the medium of exchange" or any type of goods, while the other is a service or labour.
In a Rental transaction, again there are two produce involved, one might be "the medium of exchange" or any type of goods, while the other is usage of assets/property.
It is very obvious in all above transactions that these involve at least two different elements, hence according to the definition of Riba the possibility of Riba does not exists in any of the above.
The basic division lies in the number of elements in a transaction, if there are minimum two elements in a transaction i.e., trade, barter, service contract, rental agreement, there is no Riba in such a transaction, while it is must for riba that the transaction is based on single element. This is fundamental difference in Riba transaction and trade transaction because it is only possible to create an artificial shortage in a transaction involving one produce only.
Riba and Islamic Banking
Islamic banking, which principally should be completely free from Riba (interest), is practiced under the same "fractional reserve" banking system that has to maintain a minimum "capital adequacy ratio" instructed by central bank of the country they are operating in.
Capital Adequacy Ratio (CAR) is a defined percentage of customer's deposit that goes to the central bank while the customer's bank is free to lend/invest remaining part to its other customers, also it is the main constituent of formula that define the "money multiplying factor" in monetary terms. The banks to create money use "Money multiplying factor". One of the simplest formula for money multiplying factor is:
MMF = DEPOSIT/CAR
An important observation
In the existing system of money creation by the banks, what an Islamic Bank would be doing? If they are also involved in the creation of money and issuing banking instruments based on the newly created money, then they must be extremely conscious in designing financial and investment instruments, a wrong assessment or interpretation of Islamic principles may create the same effect of the instrument.
Source: Almujahideen
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