Principles of Islamic banking and finance/PIBF201/Rationale for Islamic finance/Prohibition of ''Riba''

This section will discuss among other relevant topics such as the definition of riba and evidences of its prohibition in the first two primary sources of Shari`ah, the rationales behind the prohibition of riba.

The Meaning and Definition of Riba

Riba is an Arabic word, derived from the verb raba that literally means: a) ‘to grow’ b) ‘expand’ c) ‘increase’ d) ‘inflate’ e) ‘excess’. The same literary meaning has occurred in many places of the Qur’an as well. It is, however, not every growth or increase, which falls in the category of riba prohibited in Islam. It is generally translated into English as “usury” or “interest”, but in fact it has a much broader sense in Shari`ah. Riba in the Shari`ah, technically refers to the ‘premium’ that must be paid by the borrower to the lender along with the principal amount as a condition for the loan or for an extension in its maturity.

In the terminology of Islamic Fiqh, Riba means an increase in one of two homogeneous equivalents being exchanged without this increase being accompanied by a return. The term riba is, however, used in Shari`ah in two senses. The first is riba al-nasi`ah and the second is riba al-fadl. Some Muslim scholars attempt to define riba, which seems to be closer to the sense implied in the verses of the Qur’an and Hadith related to it. They define Riba as an increase or excess which, in an exchange or sale of a commodity, accrues to the owner (lender) without giving in return any equivalent counter-value or recompense to the other party.

In the pre-Islamic and early Islamic era, riba signified the increase of money in consideration for an extension of the term of maturity of a loan. The pre-Islamic and early Islamic Arabs used to pay the money on loans and received a certain sum leaving the principal sum untouched. When the maturity date expired, they would claim the principal sum from the debtor; if it were not possible for the debtor to repay, they would increase the principal sum and extend the term. Thus, there were transactions with a fixed time limit and payment of interest, as well as speculations of all kinds that formed an essential element in the trading system of the pre-Islamic era. A debtor who could not repay the debt i.e., money or goods, with the accumulated interest at the time it fell due was given an extension of time during which to pay, but at the same time the sum due was doubled. This is referred to clearly in the Qur’an:

“O you who believe! Do not devour riba multiplying it over, and observe your duty to Allah that you may prosper” (3:10).

'''The Prohibition of Riba in the Qur’an '''

The prohibition of Riba in the Qur’an developed gradually and appeared in four revelations. The first revelation was revealed in Makkah before the prohibition of Riba for which the verse paved the way. It says:

“And whatever you lay out with the people in order to obtain an increased return, this increases you nothing with Allah, but whatever you give in alms, seeking Allah’s pleasure, it is those who receive multiplied recompense” (30:39).

The second revelation was revealed in Madina, which mentions riba:

“Because of the sinfulness of the Jews, We have forbidden to them certain good things that were permitted to them, and for their hindering many from Allah’s Way. In addition, for their taking riba, though they were forbidden, and that they devoured people’s wealth in falsehood, and We have prepared for the unbelievers among them a grievous chastisement” (4:160-161).

An express of prohibition follows in Surah ‘Al `Imran, which mentions riba and bans it for the first time:

“O you who believe! Do not devour riba multiplying it over, and keep your duty to Allah that you may prosper” (3:130).

This was the first verse revealed in Medina to impose a ban on riba. In interpreting this verse, the exegetes agreed that expression ‘multiplying it over’ does not restrict the ban but expresses riba which people were accustomed to practice, assuming that this matter of multiples of multiples is no more than a description of state of affairs and not a condition relevant to the imposition.

The prohibition of riba was intensified in Surah Al-Baqarah. The verses in question, the last to be revealed in Madina concerning the prohibition of riba reads as follows:

“Those who devour riba will not stand except as one whom Satan has driven to madness by his touch will stand. That is because they say: ‘Trading is like riba’, and Allah has allowed trading and forbidden riba. So to whoever takes the admonition from his Lord, then he desists, he shall be pardoned for the past, and his affair is committed to Allah, but whoever reverts, those are the inhabitants of the Fire, to dwell therein forever. Allah will deprive riba of all blessing, and will give increase for deeds of charity; for Allah does not love any ungrateful sinner. Surely those who believe and do righteous deeds and establish prayer and pay alms, they shall have their reward with their Lord, and they shall have no fear, nor shall they sorrow. O you who believe! Keep your duty to Allah, and relinquish whatever remains from Riba if you are indeed believers. But you do not, and then be warned of a war from Allah and His Messenger, yet if you repent, you shall have your capital fairly. And if the debtor is in difficulty grant him time until it is easier for him to repay, but if you are able, write off the debt as an act of charity, it would be better for you, if only you knew. And guard yourself against a Day in which you will be brought back to Allah, then every soul shall be recompensed in all fairness for what it has earned, and none shall be dealt with unjustly” (2:275-281).

In these verses, riba is severely condemned and prohibited in the strongest possible terms. As instructed by the Qur’an (in verse 280), creditors are urged to deal justly and fairly with debtors. In the event of debtors unable to pay their debt, the creditors are asked: (a) to give up even for claims arising out of the past on account of riba, (b) to give time for payment of principal if a debtor is in financial difficulties or, (c) to write off the debt altogether as an act of charity.

Thus, the verses mentioning riba show that all unlawful accumulation of wealth at the expense of others is condemned, and many different practices by either individuals or nations are covered by this ban. The principle is that any profit that human beings seek should be through their own exertions and not through the exploitation of others. Al-Qur’an regards riba as a practice of unbelievers, it demands, as a test of belief, that it should be abandoned.

The above-mentioned verses prohibiting riba make no distinction between production and consumption loans. However, it may be suggested that this was because at that time loans were taken only for consumption purposes. Though much more research is needed, a good deal of documentary evidence has been adduced in recent years to show that loans for production purposes did exist during the time of the Prophet. It has been shown that Arab traders at that time had close ties with the political and economic life of Middle Eastern countries where loans for production purposes had been common for hundreds of years. Historical records also show that on account of political conflicts between Rome and Persia, Arab traders of Makka often worked as the via media for Roman trade with China, Indonesia, India, and Eastern Africa in the period close to the time of the Prophet. It is difficult to imagine, therefore, that loans for production purposes were absent in such conditions. Most of the commentaries on above mentioned verses relating to Riba that have come down to us from scholars close to the time of the Prophet also make it explicit that loan transactions for business purposes involving riba did exist at that time.

However, the absolute prohibition of riba in the Qur’an is a command to establish an economic system from which all forms of exploitation are eliminated, in particular, the injustice of the financier being assured of a positive return without sharing the risk, while the entrepreneurs, in spite of their management and hard work, is not assured of such a positive return. The prohibition of riba in the Qur’an is therefore, a way to establish equity between the financiers and entrepreneurs.