Riba: Uncomplicating the concept

During this blessed month of Ramadhan the ummah across the globe is caught up with harsh challenges due to wide spread pandemic and extreme measures of isolation, that dissuaded from congregational prayers and other collective observances prescribed by the Lord to please Him. While observing the assigned divine duties one among such is the payment of Zakat on whatever is due in cash or kind towards those who deserve it for their use and sustenance. Undoubtedly a complete system of financial doctrine prescribed in the holy Quran and Su’nah of Prophet Mohammad (pbuh), guaranteeing an unambiguous prosperity based on equality and peaceful social order. Yet the believers continue besieged in the controversy about the permissibility or prohibition of bank interest since colonial times, around 19th century onwards when banking institutions arrived to Islamic domains. An ardent believer while discharging his divine duties found himself in a coppice to calculate his prescribed part of zakat from his income which would be normally mixed with income from interest sources on his savings and deposits with his bank. Is interest proscribed and forbidden in the first place? If yes, how in the given times of capitalistic economy and an inalienable prevalent banking system? These questions left unanswered raise doubts and acute complexities in the mind of the believers and practising ummah as how to deal with the issue in absence of any enlightened guidance from the Islamic scholars and jurists in light of and conforming to the revelation of Holy Quran and Su’nah.

The controversy with regard to admissibility of interest first raked up in Egypt, when its Grand Mufti Mohammad Abduh permitted interest on postal savings. However, we deprive with its validity due to non-availability of any documentary evidence for the said edict. The dilemma as such continued while Islamic scholars and jurists argued and held maintaining the non-permissibility school of thought barring Muslims not to indulge in interest trading through their bank deposits.

By the mid of 20th century majority of Muslim scholars advocated the concept of Islamic banking based of ‘Mudaraba’ meaning profit sharing. This led to emergence of Islamic banking in many Muslim and even non-Muslim countries with large Muslim population practising non interest based financial trading conforming to the rulings indicated in holy Quran. Still the question continued to be asked if banking interest is permissible giving rise to discord and lack of unanimity of opinion. Many Islamic scholars, even though continued to believe that banking interest is not prohibited by Islam. Thus towards the end of the century modern commentators of Holy Quran translated ‘Riba’ as usury and not as simple banking interest.

For the convenience of readers let us first know what is ‘Riba’? Its root meaning in Arabic is growth, to enhance, to multiply. This obviously is interpreted by the Islamic thinkers as unjust growth. One should not fatten oneself on the expense of others leading to gross injustice in the society.

Taking the argument further ahead we see if one continues to indulge into ‘Riba’, the Holy Quran warns against it. Here the question arises, is bank interest severe in consequence in the sight of God?

As we all know there were no banks during the inception days of Islam. People used to borrow from private money lenders and would be returning double or more than the actual amount. Thus the practice of ‘Riba’ would entail doubling of double, leaving the borrower devasted and ruined who most often would borrow for his personal needs or small trading activity. This certainly was condemnable and invoked wrath from Almighty as indicated in his divine revelations. Islamic scholars after minutely discerning the subject have concluded banking interest is far from ruinous and its rate being fixed by market operations to increase or decrease liquidity in case of inflationary or deflationary pressures on the system. As such a bank cannot be perceptually conceived as an exploiting institution. While on the other hand, it functions as a regulatory institution facilitating the financial operations between borrowers and lenders.  Some jurists argue that interest is not permissible as there is no element of risk and its rate is fixed. While as no such  revelation is observed in the Holy Quran itself. If we say the argument is valid then even investing in a building and giving the premises on rent will also not be permissible as rent is fixed and there is no risk involved. Therefore the Holy Quran denounces ‘Riba’ being an exploitative practice leading to unjust growth, not because there is no element of risk involved.

In the contemporary times many modern Islamic scholars and jurists feel that banking interest is not prohibited by Islam. Prof. Fazlur Rehman, a renowned Islamic scholar who taught in the West for major part of his life wrote on the permissibility of or otherwise banking interest with deep introspection in conformity with the divine dictates and the evolution of financial systems over the medieval era attempting to bring in clarity to the controversy for the believers in observance of their duty. While expatiating on the modern controversy on interest he admits majority of the religious thinkers and philosophers of the world have condemned it. However, with the passage of time various theories of the rate of interest were put forward. The available literature on the issue is full of arguments about high and low rate of interest. Economists around the world believed the intrinsic characteristics of interest to create ‘liquidity preferences’ for speculative purposes and results in keeping money supply in hoards for the rate of interest to rise. While as among the Islamic writers, the prevalent view is that the institution of interest is neither indispensable nor ineradicable. Some Muslim economists advocate that interest should be prohibited regardless of its level and of the nature and purpose of the loan involved. However there are still many others for whom it is not clear whether the Holy Quranic ban also covers that institution of interest as it exists today. They claim that what Holy Quran banned was the ancient Arabic practice of ‘Riba’ which allowed the doubling and redoubling the debt when the borrower failed to make restitution on time. It was thought that in pre-Islamic era ‘Riba’ was responsible for the effective enslavement. Hence the ban must have the elimination of the potent source of inequality and communal unrest. Due to some conflicting traditions, some writers thought the controversy on ‘Riba’ is not merely due to the meaning attached to it by translators of the Holy Quran, in which case the insertion of the word ‘Interest’ for usury would have resolved the matter. He further quotes, Yusuf Ali, yet another eminent translator of Holy Quran translating “Riba’ as ‘usury’ and states that “ My definition (of Usury)  would include profiteering of all kinds but exclude economic credit, the creature of modern banking and finance.

The learned professor of eminence continues with his argument and debates whether the ban on interest should also apply to commercial bank interest charges. Those who support the commercial interest think that Islam prohibited interest only on commercial loans, which entitled the exploitation of needy and the under privileged. So far as commercial and productive loans are concerned, Islam has no objection and as such there is nothing wrong about interest in modern banking. The concept of cost of capital is a controversial issue among many Muslin scholars. In modern context, the cost of capital originates from the concept that money is a limited stock and it cannot be free commodity, hence there should be a price for it.

Throwing further light on the subject of defining the nature of ‘Riba’ particularly the tradition related to exchange of same item. A Hadith by a client of Prophet (pbuh)  Abu Rafi relates “the Prophet (pbuh) borrowed a young camel from some person, and when camel of the Sadaqah came to him, he ordered me to pay back the man his camel. When I told him that I could find only an “excellent” camel in its seventh year, he said ‘give it to him, for the best person is he who discharges hid debt with something better.”   A similar Hadith in the Su’nah of Abu Da’ud is “ Muharib reported that he heard Jabir b. Abd Allah saying that Prophet (pbuh) owed him  ( Jabir ) some money and at the time of repayment of thr loan the Prophet (pbuh) added some money in excess of the principal borrowed.”

In modern times when commercial interest is considered as ‘Riba’ by the Muslim traditionalists, their most persuasive argument is that it is unjust to demand a reward without participating in the risk taking of enterprise. Yet according to this definition large number of economic transactions can be brought under ‘Riba’. Such as what about the doctor who charges a fixed fee without ensuring that his treatment would certainly have a positive effect on the patient? Why should a lawyer charge fixed fee without any guarantee of successful defence of the case?  And why should a labour union contract for a fixed wage rate without caring the profitability of the enterprise? And these are the relevant question asked when the nature and definition of ‘Riba’ is discussed. yet some ardent faithfuls have been taught and are seen arguing to refuse accepting the interest earned on their savings from the banks and feel satisfied with their obligation of owning pure income and payment of zakat. Such believers may know that their money is already used by the system to earn interest, good money mixed with bad and  just by refusing not to recieve the said interest from bank does not exonerate them from the punishment as in the case of one who recieves it.

Tailpiece

In the current scenario particularly the life of Muslim ummah in India during this pandemic tough times has been quite challenging, a true believer is faced with variety of obstacles to meet his obligation towards his Lord and seek peace and blessings from Almighty for a better living. The controversy of paying zakat in the prevailing system becomes harder for him to transparently dispense with this important obligation and live with peace and clear conscience. It is therefore the duty on the shoulders of Islamic scholars, jurists and thinkers to enlighten ummah in this regard on as to how such an obligation can be met in the given circumstances so the believer lives without doubt of any kind or baggage on his mind during his life time.

Fayaz wani Retired as DGM, Development Banking from JKSIDC.