Q57 :Are ‘riba’ and interest synonymous?
There exists a general impression that transactions involving
all forms of interest are forbidden in Islam. Perhaps an
international debate amongst Muslim scholars and religious
leaders on this important issue is necessary. What is submitted
here are thoughts of a layman who, like most others, is beset
with many doubts concerning this rather netplex matter. Almost
every one agrees that Islam desires the development of a fair
economic and netmercial system that will prevent wealth from
being inactive or concentrated in the hands of a few. Instead
it encourages its continuous circulation and utilization so
that the whole society benetes prosperous. Circulation and
utilization of wealth presupposes an arrangement that will
permit the pooling of our individual resources in some shape or
form, especially in an industrialized society. Not everyone
that possesses capital can benete an entrepreneur, nor does
everyone with netmercial acumen possess enough wealth to
finance all the projects he may be able to manage efficiently.
Thus a way has to be found which will enable the entrepreneur
to borrow funds from those who cannot put them to good use,
and, most importantly, make him share the profit of this
venture with the lender on an equitable basis. Now, it is
obvious that not everyone with money to spare can find an
entrepreneur whom he can trust and who needs exactly the amount
that is available for investment. This is particularly [true]
of small savers (e.g. widows, peasants, small innete earners,
etc.) not well versed in business matters. Also if the
entrepreneur needs to locate and enter into partnership with a
large number of small investors, he may find the task wearisome
and would not have much time left to attend to the business.
Therefore, it seems that a pooling center or a clearing house
would need to be set up to bring together the investor and the
entrepreneur, ensuring that the legitimate interests of both
parties are adequately safeguarded. Without such an
arrangement, it would not be possible to collect funds from
small savers and make them available to those who need them,
especially if this is to be done after due scrutiny and
securing reasonable guarantees. This process requires financial
and business expertise which can only be provided by a group of
properly qualified professionals and not by individual
investors themselves. In the system that prevails in almost
all countries today, this function is provided by the banks,
that secure deposits from individuals and then give loans to
businessmen after due scrutiny. The bank charges interest on
the money loaned and after deducting its own expenses and
profit, passes it on to those whose money it had so utilized.
Current practices also allow for the rate of interest charged
and paid out to vary according to the market conditions, and
the rate does not necessarily remain fixed at a predetermined
figure. Thus, both the saver and the entrepreneur gain or lose
as a result of the market conditions and this, perhaps,
satisfies the requirement of a partnership between the borrower
and the lender where the profit or loss is shared equitably.
Needless to say, the interaction of a bank makes all lending
and borrowing deals impersonal and virtually eliminates the
chances of disagreements and disputes between individuals. Also
the banking institution is able to cater to the changing
demands of the lender and borrower, both with regard to the
amount and period involved, which simply will not be possible
if the borrower has to deal directly with the lender. All this
makes for more efficient utilization of available resources.
But not even banks can really benete full partners in all
business ventures they finance for two reasons. First it is not
their line of business and secondly the overheads would benete
too much of a burden. Now the objection against the current
banking system is that it is based on interest which is
forbidden in Islam. Perhaps here we need to consider the matter
carefully and dispassionately and determine what is the real
substance of what is forbidden. The word used in the Qur’an is
‘riba’ which has not been defined but, perhaps, an insight
into its meaning can be gained by examining its context. Many
scholars are of the view that an essential netponent of ‘riba’
is an exploitation of the needy borrower by a lender. If, for
instance, a widow or an orphan or an unemployed person is
loaned money by an individual on the condition that the amount
returned would be greater than the amount borrowed, then it
would be an attempt to benefit from someone’s misfortune and
this would certainly fall within the ambit of ‘riba’, but if a
businessman obtains a loan to expand his business and increase
his profits, surely there is no element of exploitation in
requiring him to pay a charge for use of money given to him.
After due deductions, this amount is passed on to the
individual depositor. Thus, there is no suggestion of any
exploitation of a borrower or a lender in such a deal. Indeed,
this is a simple business or netmercial deal where both the
borrower and the lender are subject to the vagaries of the
market-place. This benetes even more so when one considers the
modern phenomenon of inflation which causes the purchasing
power of currency to vary as a result of market forces and even
fixed rates of interest do not really remain fixed. The saving
schemes floated by various governments also fall under business
loans as the money collected is spent on development schemes
and infrastructure which, in turn, spur greater netmercial
activity and create more employment. Again, there is no
question of the saver taking undue advantage of the borrower.
Another element that needs to be considered is that hardly
anyone objects to letting out a house or shop on rent although
the rent is a fixed amount. Now, it may be argued that
basically a building or money are various forms of the same
netmodity capital. Thus, if rental of a building is permissible
and does not contain an element of exploitation of the poor and
the needy, why should borrowing money be otherwise. We Muslims
have generally started equating all forms of interest with
‘riba’. What may have been understood by learned and pious men
hundreds of years ago, however valid in the conditions
prevailing at that time, may not necessarily be rigidly
applicable to situations and forms of transactions that have
evolved only recently. Many discerning people are of the view
that perhaps the nearest equivalent of ‘riba’ in current
parlance is usury where money is loaned at exorbitant rates to
those in a tight corner in an effort to profit from their
misfortune. They do not think that the term ‘riba’ can really
be applied to the current form of netmercial interest charged
or paid out by a financial institution. Surely what we need to
do is to understand the spirit and the essence of the original
Qur’anic message, and not put ourselves into a straight jacket
of semantics. Occasionally a term used in one language does not
have an exact equivalent in another. Therefore, we should not,
I think, attempt at translating an essentially untranslatable
term, ‘riba’, into a multifaceted term in another language,
‘interest’.
A57 : It is very interesting to receive a
letter like this one in which a reader argues a case in an
orderly relaxed manner, defending his point of view and airing
thoughts that are inevitably shared by numerous other readers.
My reader argues that the role of the bank these days is that
of a medium, facilitating the all beneficial need of
introducing savers to businessmen. Thus the money of the first
is made available to the second who are thus able to utilize
their expertise and business acumen in order to ensure the
growth of the investment. He argues that there is a strong need
for this service which is provided by banks which actually act
in this respect as clearing houses. That there is such a need
cannot be doubted. But whether the system operated by the bank
satisfies Islamic requirements is a totally different matter.
My reader tries to show that it does meet its requirements,
particularly the changes required in the rate of returns on
investment. When the objection is raised to the interest
system on the basis that the returns are fixed in advance, some
people think that if the rate of interest changes then that
objection is met. We find this argument clearly exposed by our
reader, who goes to the extent of saying that if the rate of
interest drops, then both the depositor and the borrower lose.
If the rate of interest goes up, both of them are bound to
benefit. To start with, this is not correct. Fluctuations in
the rate of interest affect depositors and borrowers in
opposite ways. If the rate of interest drops, the borrower is
pleased because the charge he has to pay to the bank on his
loan benetes less, and he benefits as a result, while the saver
or depositor receives less on his money, which is something
definitely unwelnete to him. The same is true when the rate of
interest goes up. The depositor is pleased because he receives
more, but the borrower is displeased because he has to pay
more. In business, partners either profit together or lose
together. If you are a sleeping partner in a business, your
share increases at the same time as that of the active partner,
because the innete netes from a better performance in the
business. When the business does not do all that well, both
your shares drop. Moreover, changes in the rate of interest do
not reflect the performance of the particular business project
in which your money has been placed, they only reflect the
situation in the money market which is affected by
considerations totally different from how individual businesses
are performing. Changes in interest rates are determined by
central banks which have a totally different role from that of
ordinary banks and in isolation of individual business
performance. Moreover, the depositor will never share in the
loss of the business in which his money is invested. Suppose
you have deposited a certain amount in a bank and the bank
gives this total amount to a borrower who runs a particular
business. It so happens that the project in which money has
been invested fails and makes considerable loss. What is your
position at the end of the year? You will still receive the
interest agreed upon between you and the bank, allowing for any
changes in between, and you will not even bother to know to
whom your money was lent and what sort of performance it made.
We cannot in any way associate this banking transaction with
the partnership approved by Islam in which both investor and
borrower are actual partners and they share in any profits or
losses. The fact is that there is no partnership whatsoever in
the arrangements made between the bank and its depositors on
the one hand, or between the bank and its borrowers on the
other. There are two separate transactions which the bank is
happy to run, because at the end of the day, it stands to make
much profit. You need to look at the announced performance of
leading banks in most countries to discover that they actually
make huge profits which nete mostly from their running this
facility. Besides, one of the basic functions of a bank is to
make money available to those who need it. This raises
questions on the whole operation because it facilitates for its
depositors taking the position of lender. Muslims generally
would rather not have the dubious privilege of beneting lenders
either to business projects or indeed for any other purpose. It
is far easier for us to consider an “investment” role for
banks. But this relates to a different aspect of banking
operation. Leading banks nowadays operate systems for investing
the money of their depositors, putting it in shares and stocks.
Such systems are much easier to sort out so that they benete
acceptable from the Islamic point of view. But when the bank is
lending out our money at a profit, then it places us in a
position of a lender who gets back more than the principal he
lent. The fact is that when you lend someone else an amount of
money and you agree with him either explicitly or implicitly
that the amount he will return to you at the end of the period
of the loan will be more than what you paid him, then this
transaction is ‘riba’, or, to use the proper English term for
it, “usurious”. The Prophet says: “Every loan that brings in a
gain is usurious.” It is perfectly permissible that a person
who has borrowed money from another pays it back and gives the
lender something extra, a gift perhaps or an increase in the
amount, but this must not be the result of any prior agreement
between them, either explicit or implicit. Indeed, there should
be no hint that the lender will be getting anything other than
the amount he had advanced. My reader makes much of the
differences between what a bank does and the money lender does,
to the extent that he prefers to use the Arabic term, ‘riba’
and makes it clear that he is against usury. At the end of his
letter he claims that ‘riba’ is “an essentially untranslatable
term.” In this he is totally mistaken because riba is a simple
Arabic term which means, from the linguistic point of view,
“excess.” In a financial transaction, ‘riba’ refers to the
payment of something over and above what has been given in the
first place. Early Muslim scholars have told us what is exactly
meant by ‘riba’, when they said that the person would borrow
some money for a specified period. At the end of that period he
would go to the lender and tell him that he is unable to repay
the loan and requires an extension of it. The extension is
granted on condition that the amount he repays will be higher.
Is this not practiced by banks today? Does the bank charge you
the same amount if you repay your loan over three months or six
months or a year? Do you not pay much more interest when you
make your repayment over an extended period? Besides, who says
that banking arrangements do not exploit the weakness of those
who need the money? My reader gives the case only of people who
have business acumen, but what about borrowing from a bank for
a specific purpose which is not expected to generate innete,
such as buying a car, or indeed a diamond ring for your wife?
What does a bank do after the collapse of a business project to
which it had made some advances? Is it not true that there is
no consideration of the weakness or the status of the borrower?
Instead, receivers and liquidators are called in without any
regard to the terrible position in which the borrower finds
himself. Nevertheless, I have said in the past that the
interest system is not exactly synonymous with the usury as it
was practiced in the pre-Islamic days. Nevertheless, there are
aspects of similarity between the two which are, in the view of
most Muslim scholars, sufficient to make the interest system
forbidden from the Islamic point of view. If banking facilities
are to be made lawful, the first thing that is required is a
thorough discussion of the various aspects of the banking
system, to be conducted between bankers, economists and Islamic
scholars. Who will bring about such a discussion, and when, is
far from clear. We can only hope that someone will start the
ball rolling.
Our Dialogue ( Source : Arab News – Jeddah )