For Devout Muslims, Interest Is Forbidden

Of Riba and Interest




Allah (SWT) Says in The Holy Quran:
O you who believe! Fear Allah, and give up What remains of your demand For usury, if you are indeed believers. If you do it not,
Take notice of war From Allah and His Messenger :
(Al-Baqara : 278,279)

The Qur'anic prohibition of taking 'al-Riba' is clear and categorical.  It can never be disputed. Here we must be able to make a distinction between 'al-Riba' and 'Interest'. One school of thought believes that what Islam has prohibited is al-Riba, not Interest. Another school of thought feels that there is no distinction between Riba and Interest. Therefore the main question which is to be answered is whether there is any distinction between al-Riba of The Quran and Interest of the capitalistic world.

Let's understand the meaning of al-Riba in its correct historical perspective. The common meaning of the term al-Riba meaning growth or increase is not helpful for the purpose of our analysis, because any increase like an increase from trade is not prohibited. But the use of definitive article 'al' before 'Riba' is indicative of the fact that Riba refers to that practice of taking in increase in the amount from the debtor which was prevalent among Arabs and was familiar to them at the time of the revelation of the Quran. Consequently the 'Ulama', generally, have accepted it. Now we have to see what type of Riba was actually then prevalent among the Arabs. A number of jurists of great repute tried to define Riba of the Jahiliyyah. According to Mujahid, "Riba of the jahiliyyah, which God has forbidden, was that if a person owed a loan to another person he would say to him, 'I would give you so much if you grant me extension of time'." Iman Maliksays : "In the jahiliyyah, the Riba was that when a person gave a loan to another person and that period expired, the lender would ask the debtor whether he would return the debt or increase the amount? If he made the payment it would be accepted, otherwise the amount of the debt would be increased and the lender allowed an extension." Almost similar sentiments were expressed by Imam Razi.

He says : "The people of Jahiliyyah used to advance their money and recover Riba monthly without affecting the sum advanced. When the time for settlement came, the principal amount lent was demanded and if the debtor was unable to pay, the lender increases the amount in his own favour and granted extension of time." This was how the Arabs of the jahiliyyah used to transact their lending operations. From all these observations of these learned jurists of different ages, it can safely be said that Riba which was prevalent in pre-islamic era consisted in extending the time limit and increasing the amount due so that the borrower would at the end of the period of the loan return to the lender double or even more of the principal sum. Thus, judged by any standard of socio-economic ethics, the rate of Riba was excessively high. Thus The Quran's prohibition of Riba came:

O you who believe! Devour not usury, Doubled and multiplied;
But fear Allah; that you may (really) prosper. (Al-Imran : 130)

Again in Al-Quran, Allah(SWT) says: Those who devour usury Will not stand except As stands one whom The evil one by his touch Hath driven to madness. That is, because they say
"Trade is like usury." But God hath permitted trade And Forbidden usury. (Al-Baqara : 275)

Hazrat Muhammad (Sallallahu allayhi wasallam) has prohibited the giving and taking of Riba. Hazrat Jabir radiyallahu anhu has reported that the Messenger of Allah sallallahu alaihe wasallm cursed the devourer of usury, its payer, its scribe and its two witnesses. He also said that they were equal (in sin). (Muslim)

Prophet Muhammad (Sallallahu allayhi wasallam) even at his last sermon (Khutbatul Wada) prohibited the give and take of usury. Hazrat Muhammad (Sallallahu allayhi wasallam) said,"Allah has forbidden you to take usury(Interest); therefore, all interest obligations shall henceforth be waived. Your capital, however, is yours to keep. You will neither inflict nor suffer any inequity."

Let us now talk of interest. Interest is fixed addition to borrowed capital. It is argued that this fixed addition is a reasonable charge for the use of money employed in productive process, whereas Riba refers to usury on unproductive loans which prevailed in pre-islamic days when people were not used to productive loans and their influence on economic growth. But to me, if there is any difference between Riba of The Quran and Interest of the capitalistic society, it is one of a degree, not of kind, because both Riba and Interest represents excess over borrowed capital. Riba was considered to be unsophisticated compared to interest. But calling Riba or Usury by the name of Interest will not change its character. The fact of the matter is that the term "excess" must be taken in a relative sense, because what is a reasonable "excess" today may be considered to be an usurious rate tomorrow. Many co-operative societies of the Indian sub-continent used to charge 12-15% interest and at that time it was regarded as reasonable. But today it is considered to be excessive. Therefore, the prohibition of Riba means prohibition of all types of excesses over borrowed capital whether we call it usury, interest or earning of the capital. In fact, capital invested in trade may bring an excess called profit, which is variable and implies loss also. But capital invested in banking brings interest which is fixed and does not imply any loss whatsoever.

It is also incorrect to say that in pre-Islamic days loans were not granted for productive purposes. We have had record that the Jews Of Medina advanced money not only for consumption purposes, but also for trade.. Mere existence then of "Mudarabah" or 'sleeping partnership among the Arabs was not indicative of the fact that productive interest was not in vogue among them. The difference between productive and unproductive loans is a difference of degree. If interest on consumption loan is harmful, then interest on productive loans must be harmful, because it enters into the cost of production and consequently in price. It is the consumers who are to bear the burden of higher prices.. Therefore in the ultimate analysis, Riba of The Quran and Interest of the modern banking are two sides of the same coin.

May Allah Guide us all to the Straight Path. (Ameen) 


Sharia compliant mortgages

By Zoe Coleman

It was an unusual sight - hundreds of businessmen listening attentively while a small group of top-notch Islamic scholars instructed them on the intricacies of Muslim ethics. These were bankers, and what they wanted to know was how they could do better business with Muslims. 

The Islamic Real Estate Finance conference in London was the culmination of a year-and-a-half of change in UK Islamic finance. This came after The Bank of England's request,early in 2002, for high street banks to create financial solutions for Muslims. 

Practical changes are now on the way. But while these changes could mean great things for the Muslim community, changing their long held attitudes to banking will take longer. 

Islam, ethics and finance 

Until recently, mortgages were a religious obstacle to any Muslim who wanted to buy a home. Muslims must be sure that the mortgage complies with Sharia (Islamic) law. The biggest problem for a British Muslim who wants to buy a house is that either paying or charging of interest is prohibited. 

Most UK mortgages involve the house-buyer borrowing the money and paying it back with some interest charged on top. No good for Muslims. To avoid the issue of paying interest, Muslim mortgages usually involve the bank buying the property and then the buyer purchasing it from them and renting it over a length of time at a slightly increased price. 

Muslim mortgages also involve making other aspects of the mortgage Sharia compliant, for instance making sure that the money the banks use to buy the property comes from permissible sources. 

Why now? 

Until July 2002 only one financial institution in the UK has directly offered Islamic mortgages (The United Bank of Kuwait). The shortage of Muslim mortgages was due to a combination of technical and cultural problems. 

Stamp duty was one of the biggest problems. Stamp duty is a one-off tax that is charged on every property sold. But stamp duty was being charged twice on Islamic mortgages because in a Muslim mortgage the property is in theory bought twice (once by the bank and once by the buyer). 

Banking institutions also lacked knowledge not only of Sharia, but also of the Muslim community itself, and this probably held up the development of Sharia compliant products. All financial products for Muslims must be checked by a panel of Muslim scholars, and bankers were not used to working with religious experts and were unfamiliar with the language of the Qur'an. 

But change is happening fast. The law on stamp duty has now been altered - double stamp duty was abolished on Islamic mortgages in April 2003 - and the government has been urging banks to work with Muslims. One of the first results came on the 12th of July 2003 when the HSBC, one of the biggest banks in the UK, brought out a range of Sharia compliant mortgages. 

What's the difference? 

This new interest in Islamic finance may seem like a dream come true for Muslims, but some remain cynical about the mortgages on offer. UK banks need to work on gaining the trust of the Muslim community. They have ignored the needs of Muslims for a long time so it is not surprising that many Muslims are concerned that the banks are not really taking Muslims' ethical concerns seriously. 

A big concern for Muslims is that they have to find more money in the beginning than borrowers going for a traditional mortgage. Sharia mortgages usually involve paying a large deposit, often around thirty percent of the total cost. 

Arshad Majid who helped to set up Sharia-compliant mortgages in the US says that this is not necessarily a bad thing. "You could argue that the larger down-payment is actually decreasing your costs over time. It's giving you a greater percentage of equity in the property at a faster rate." Arshad also stresses that following Sharia law is about doing what is right, not saving money. "No one says that Islam is an easy religion to follow, but we believe that the rewards of being a Muslim are great as well halal food costs more money than regular food, yet nobody thinks twice about buying halal meat. Why would you think twice about doing Islamic banking?" 

Some Muslims are not convinced that banks will test their products rigorously enough. But Nizam Yaquby, a highly respected Sharia scholar who advises banks, has been impressed by the way HSBC has approached Muslim finance. Scholars were called in to advise on the Sharia-compliance of the new mortgages and he says he is satisfied with their efforts. 

Others are concerned that the banks may be using money in non-permissible activities (like financing breweries or non-halal meat companies). Many scholars concede that laws regulating money in the UK cannot be as strict as they would be in Muslim countries while still making sure the products on offer conform to Sharia. 

It may take some time and some changes within the Muslim community before Muslims are happy with the mortgages on offer but home ownership is an important step forward for Muslims that should lead to greater financial stability and greater social inclusion.