Inthe Islamic law, the (Riba) interest is one of the forbidden sourcesof wealth. While the Sharia tries to shun this type of money value,its real definition is at stake. Riba has been defined into differentcategories. In the economic context, it is generally referred to asexploitative and unjust gains from a business or trade. It iscondemned in various verses of Quran (30:39, 4:161 and 3:130) andHadith. Muslim fraternity asserts that Riba is indeed forbidden (Ali,2011). The primary source of profits for any financial institution isthe provisions of the interest on the loan advanced to the customers.The banks and other financial institutions, therefore, require anunderstanding of how the condemnation of Riba comes on board (Ahmad,& Hassan, 2006). These financial institutions also need to deviseanother way of getting appropriate income without breaching theIslamic law. This research paper gives an in-depth analysis on theconnotation concerning the prohibition of the Riba in the Islamicfinancial system. Notably, the research discusses the history andetymology of Riba. It also provides Quran and Hadith scriptures onRiba and their prohibition. Additionally, it dwells on thestipulations outlined in the Sharia (Islamic law) about Riba.Furthermore, issues on forbidding interest as Riba is also discussedwith keen attention to the benefits it brings on board in thefinancial system. The paper lastly provides the alternative ways ofdealing with interest without breaching the Sharia by providing asubstitution for Riba. The main aim of this research is to unveil thetrue meaning of Riba, why it is prohibited and the best alternativefor the current financial system.
TheDefinitions and Etymology of Riba
Theword Riba was first used by the Arabs before the Muslims to mean anincrement. In the Islamic law, it meant an incremental value thatdoes not have a counterpart. Some of the pertinent definitions ofthis word include the surplus value while borrowing or lending moneyunjustifiably. It also means an exchange which is non-equal and ausurious interest. In the ancient Islamic law, entering into acontract with a lender where the borrower promises a particularreturn was unjustifiable (Ajija, Annisa, & Hudaifah, 2012). Infact, it portrayed that the lender would be imposing on the borrowerunfair obligation. In the current financial system, most Muslimcountries have banned the notion of compound interest on loans whileallowing moderate interest only (Rosly,2005).In this respect, they try to ban all the additional increments on theprincipal value of the loan advanced to the borrower. There arevarious kinds of Riba such as al-fade, an-jahiliya, and an-nasiyawhich are all practices in the context of Islam financial system(Hosein, 2007).
ScriptureReadings on Riba
Thereare two sets of Islamic scriptures that talk about Riba the Quranand the Hadith.
TheCondemnation and Quran
InQuran, several scriptures talk about the prohibition of Riba.Instinctively, twelve verses deal with it in the Quran. In total, itappears in these verses eight times. The verses are such as 2: 278,2:276, 4:161, 3:130 and 30:39 among others (Hosein, 2007). The firstverse to reveal this topic was the Makken Verse. Specifically, in theSurah-Ar-Rum, it says that
"Andwhatever Riba you give so that it may increase the wealth of thepeople, it does not grow with God"(verse 30:39).
Fromthe verse, it gives the Muslim believers the mindset that indeed theact of Riba is not justified. It should, therefore, be prohibitedsince it does not go along with the will of God. In the Islamictrade, anything that does not benefit God or glorifies him is deemedto be out of context (Ajija, Annisa, & Hudaifah, 2012). To theeconomic stance, it would mean that God requires us to toil for whatwe want and not allow others to work for you. Transforming the verseabove into Surah Baqarah, it reads:
"Thosepeople who gain from the accruing interest will be compared to thepopulace who has culminated into madness through the insurgence ofthe devil. The reason for this is that they perceive trade as aninterest. Advertently, God has allowed trade but has prohibited theinterest that comes with it. God does not permit his blessingsthrough interest while he allows them the favor that the humanitygives to the weak."(Quran 2: 275-280)
Fromthe above verse, the Muslim believers are prohibited from gainingfrom any form of interest. Therefore as they trade, they are expectedto drive their income from the profits of their sales and not fromthe interests on a loan they advance to borrowers. In fact, as Muslimlends, they expect nothing but the principle amount in return(Hosein, 2007). As stated in the earlier verse, they perceivelending as a favor that God will bestow blessings upon them. aconformist scholar, Mohammed Siddiqi goes ahead to construe versesabove to accentuate that Riba is not only instinctively forbidden andunjust. But also that it is a payment that is made on top of theprincipal amount of any loan.
TheCondemnation and the Hadith
Inthe Hadith, Riba is prevalently mentioned. In the farewell sermon ofMuhammad, it is reported that he said that “Godprohibits you from accepting Riba, consequently, all the obligationsthat revolved around riba shall be waived henceforth. However, youcan keep the capital. It is important not to suffer nor inflictinequality".From the above connotations, it is clear that the Hadith accentuatesthe condemnation of Riba. It brings on board a level of inequalityamongst humanity (Ajija, Annisa, & Hudaifah, 2012). in trying toemphasize on this fact, various narrators stressed on the fact thatMuhammad cursed the issuance of Riba to the Muslim fraternity. Someof these narrators were, Jabir, Abdullah and Abdul Rahman Masoud. Thenarrators were very on the denouncing of the Riba as a way of makingsure that every person to not extort money from another. The lendingin Muslim practice is a sign of extending the favor to thevulnerable. It is through this extension of support that God`sblessings will follow.
Effectsof Riba Prohibition on the Financial System
Inmost cases, Riba has been equated to the interest rates that thefinancial institutions advance on its clients. The Muslim countriesin most cases have devised various law and decrees that prohibit theadvancement of loans and adding interests on it (Hosein, 2007). Forexample in Kuwait, Article 546 of the Civil Code accentuates that anyloan that is advanced to the public will be done without any intereston it. in cases there is any condition, the said state will prevailover any contractual agreement. In this line of action, any personthat has lent a loan to their customer expects only the principleamount. If there were a prior consent on the payment of interest,under the court of law, the ruling of payment without interest wouldprevail (Ahmad, & Hassan, 2006).
Additionally,in Saudi Arabia, the chapter 2 of the Monetary Agency Act states thatany financial institution in Saudi Arabia shall not receive or payany interest on the loan. However, the system is allowed only tocharge the fees on the cost incurred while processing and acquiringthe loan. In the expense, the organization will also include thecosts that are due to the government in the form of taxes and otherfees accentuated for operations (Hosein, 2007). It is howeverreported that the banks of Saudi Arabia have a benchmark interestrates which the banks are regulated for the lending purposes. Itshould be noted that the main aim of the banks is to make profits.The primary source of profits for the bank is the interests on loans.To integrate this into the Islamic banking, the banks have come upwith other additional charges that would help in getting the profitswithout charging the interests (Rosly,2005).
Prohibitionof Interest as Riba
Variouseconomists and scholars have fervently tried to provide substantialarguments for the ban on benefits as Riba. Their arguments areusually based on the teachings of Quran and the probable impact thatinterest has on the humanity. The religious point of view condemnsthis act of imposing interest. They do this on the account that itbrings inequality to the distribution of economic resources. Saeed,(2009) argues that interest is a rib. He based his argument on thefact that interest is an equally distributed or unearned income. Healso accentuates that, even if the interest rates are lower and theconsent of the two parties that is still considered unlawful andunjust. The arguments can be traced from the Sharia where itprohibits any different gain from any other parties (Saeed, 2009).
Tajial-Din connotes that the inception of interest promotes the unequaldistribution of wealth between the rich and the have-nots. He arguesthat if the interests on loan are advanced on the individuals, itwill cause a disparity between the rich and the poor. As the bankslend to individuals, they have set criteria for lending. They onlygive loans to those who can manage to pay back (Hosein, 2007). Itmeans that the loans cannot be advanced to the needy in the society.The interest, therefore, tends to give more wealth to those whoalready have while leaving the poor to get poorer. This notion inmoral perspective promotes inequality amongst humanity. The fact thatthis act is encouraged both in the Islamic laws and the Quran, it isdeemed to be a Riba (Ajija, Annisa, & Hudaifah, 2012).
Intrying to make the banks more profitable but still maintaining theprohibition of interest on loans as Riba, the current financialsystems have come up with solutions on the same. One of the solutionsis to increase the fees and charges for the acquisition of the loan.One of the charges here is the government operation license fee(Rosly,2005).For any banking institution to operate, it requires the authorityfrom the government. The companies, therefore, have to make sure thatthey get these costs inculcated in the charges. Additionally, thereare processing fees (Saeed, 2009). These are the fees that the bankwould charge the borrower to help it maintain its employees. Thestaff salaries and other compensations will, therefore, be expensedthrough these incomes. In the event of any default by the borrower onthe payment of the loan, the loan should be paid by an insurancecompany who will require premiums. Therefore another fees pegged onthe loan is the insurance premium prices which would ensure continuedrepayment of the loan in case of any default (Ahmad, & Hassan,2007).
TheBenefits of Prohibition
Eventhough the forbidding of the interest will diminish savings, it hasthe effect of creating profound stability, development, andefficiency in the financial system. Additionally, the replacement ofthe fixed rate with the notion of sharing the profits would creategreater stability in the financial system. It also promotes theentrepreneurial culture within the economy. This replacement alsopushes the advent of job creation in the country. It will not alsocollapse the savings since savings is a function of income in mostcases. The interest is a minor role of savings. The stimulations ofjob creation also are a practice which is in line with the Quransince it promotes equality within individuals (Iqbal, 2006).
Onepart where criticisms about interest fees have gone ahead of nakedtruth as inferred by Islamic scholars revolves the external debt ofundeveloped nations, where in some instances the borrowers havepreviously paid Principal amount "severally, but the debtincreases faster than they can reimburse it." Some severelyindebted nations include Comoros, Guinea, Afghanistan, and Malawi(Hosein, 2007). The pressure group for debt clemency does notpremeditate that interest is wicked. However, both interest andamount borrowed of the major exterior loans should be assumed.Thisnotion is because: liability repayment will be better spent onreduction of poverty. Banks should have understood that the borrowingnations poor populace are not accountable for the debt since it waslent to autocrats or oppressive rules, with lots of the funds waslost to bribery and wasteful investments (Saeed, 2009).
Ina nutshell, Riba is a surplus gain from any money given or received.There are various statutes in the Islamic laws that have disputed thevery inception of Riba. According to Quran and Hadith scriptures,Riba is prohibited since it makes individuals gain or lose wealthunjustifiably. Riba has been connected to interest since they havealmost the same impact on the humanity. Riba creates a rift betweenthe poor and the rich since it takes more from the poor and adds itonto the rich through the unequal gain (Chapra, 2006). Similarly,interests on loans provide grounds for circulation of wealth only tothe rich and not the poor. The banks therefore are usually prohibitedfrom advancing interest on loans to their customers. In thereplacement of Interest with profit sharing has create a platform forunderstanding between these parties (lenders and borrowers). It istherefore expected that the borrowers would use the money in makingprofits and would share the benefits with the bank. The inception ofthe Islamic laws on Riba has therefore transformed the globalfinancial system (Iqbal, 2006).
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