What is Riba?
Question: The Holy Qur'an has prohibited 'Riba'. What is meant by this term? What is its true definition and connotation in the light of the Holy Qur'an and Sunnah of the Holy Prophet (sws).
Answer: The Riba that the Qur'an has prohibited refers to the gain which the lender demands at a predetermined rate from the borrower on the loan that he gives him for a specific period of time.
1. The key word here is 'loan.' Whenever the relationship between the two parties involved in a transaction is that of a lender and a borrower, the gain at a predetermined rate which the lender makes a condition for the loan he gives for a specific period of time would fall within the ambit of Riba.
Prior to Companies Ordinance 1984, one of the modes used for financing was debentures. The relationship between a debenture holder and a company is that of a creditor and a debtor, or, in other words, that of a lender and a borrower. Therefore, ceteris paribus (especially taking inflation as zero for the purposes of this illustration), the predetermined gain that the debenture holder is entitled to on his loan is Riba.
On the other hand, the relationship between a shareholder with his company is that of an equity holder, and the gain that accrues to him out of the profits is not Riba.
2. If the nature of the transaction is such that the asset given for a period of time is to be 'used' by the receiver but, by the nature of the transaction, cannot be 'used up' by him, the predetermined gain demanded by the giver would be categorised as rent not as Riba. (For details of this point, see Appendix 1)
3. It is of great importance to remember that the Qur'an did not coin a new term when it prohibited Riba, just as it did not coin any new terms as Khamr (ÎãÑ) or Maysar (ãíÓÑ) when it prohibited liquor and gambling. Everyone who knew the Arabic of the direct addressees of the Qur'an knew what these words meant. Therefore, the Qur'an did not have to say anything as 'You are forbidden khamr, which refers to such and such drink' or 'You are forbidden Maysar, which refers to ...' In other words, the Qur'an did not have to define these terms as these were not any new terms introduced into the lexicon for the first time by the Qur'an. The meanings of these words were well-known to those who understood the language. Nor did the Qur'an use them in any specific connotation. For example, khudi in Urdu refers to ego, vanity, pride, etc. But Iqbal has used it in a special sense. He has given it a certain emotive meaning, a certain connotation. This is clear from the context and the way in which Iqbal has used the word.
It follows from this assertion that when a general word is used in a book, usage in the lexicon of the language is the basis for determining its meaning. That is to say, how and in what sense the native speakers of the language used the word. If any person believes that such word was used as a new term or in a special sense, then the onus of proof is on him. For example, if someone says that the Khamr that the Qur'an prohibited referred to a new kind of a liquor, previously unknown to the Arabs at that time, and the word was used as a new term to describe that particular form of liquor, or he says that the Khamr that the Qur'an prohibited referred to that Khamr which was taken excessively and which, therefore, lead to inebriation, then it is he who has to prove in relation to the context and use of the word in the Qur'an that this peculiar sense emanates out of the word.
Since the Qur'an has not used Riba as any new term or as a word with some new connotation, the basis for determining its meaning should be usage. In Qur'anic Arabic, the word Riba is used in the sense already explained above as well as in the sense of increase'1. These meanings of the word have remained unchanged.2
It is clear from the Qur'an itself that when it speaks of prohibition of Riba, it refers to Riba in the first sense because if it had included the meaning of 'increase' as well, it would have entailed prohibition of any increase including that which a person gains as profit in a trade, which profit the Qur'an has clearly allowed (2:275)
4. Of late, some scholars have tried to show that the Qur'an uses the word Riba in a specific sense, that is in the sense of exploitative interest, or usury, whereby the debtor is put in straitened circumstances. In their opinion, Riba does not refer to interest at a mutually acceptable rate whereby both the parties benefit, as in the case of commercial and bank loans. This view is erroneous as is discussed in detail in the answer to the second question.
5. The Sunnah refers to those religious traditions of the Prophet Abraham to which the Prophet (sws) gave sanction in his followers after he had revived and reformed them and had made certain additions to them, for example circumcision of the male child, Rak'at of the obligatory prayers, etc.
In other words, the Sunnah relates to religious rituals and customs. Defining terms is not within its purview as such. Just as the Sunnah does not 'define' Khamr or Maysar, It does not define Riba. Just as the Prophet (sws) prohibited liquor of different kinds, he prohibited deals of different kinds which contained or could contain Riba. These prohibitions were not definitions on his part, rather they were the application of the Divine law wherever that application was required. For instance, the Prophet (sws) directed his followers to guard themselves against Riba and also against the possibility of involvement in Riba even while borrowing in barter (see Appendix 2).
The Scope of Riba
Question: What is the true scope of the transactions to which the bar of Riba is applicable? Can the term Riba be also applied to the commercial or productive loans advanced by the banking and financial institutions and to the interest charged thereon?
Answer: As already explained in the answer to the previous question (Explanation 3), the basis for determining the meaning of the word Riba is usage. There is nothing in the meaning of the word or in the context in which the Qur'an has prohibited Riba that specifies that Riba on loans extended for commercial or productive loans does not fall within the scope of the meaning of this word. In fact, the following verse of the Qur'an clearly shows that in Qur'anic times people used to give loans for these purposes, and that the Qur'an has condemned the practice of charging Riba on such loans:
And the Riba bearing loan3 that you give that it may increase in the wealth of others does not increase with Allah; and the Zakah that you give to earn Allah's pleasure, these are the people who shall get manifold [in the Hereafter]. (30:39)
Javed Ahmad Ghamidi says of this verse:4
The expression '... that it may increase in the wealth of others' is not only inappropriate for application to Riba based loans given to the poor for their personal use, but is also clearly indicative of the fact that Riba based loans for commercial purposes were given generally, and in this way 'increased in the wealth of other people'.
Nevertheless, some scholars hold on the basis of 3:130 that the Riba the Qur'an prohibited referred only to exploitative interest. For further details on why this viewpoint simply does not fit in with the Qur'an, see Appendix 3.
Riba and Mark-up
Question: The Pakistani banks and some financial institutions finance their clients on the basis of buy back on mark-up agreements. According to this method, the client of the bank purports to sell a particular commodity to the bank, and simultaneously buys it back on a high price on deferred payment basis. A certain rate of mark-up (percent per annum) is applied to the second sale. Does this arrangement fall within the ambit of Riba?
Answer: The answer to this question lies in the statement of the question itself: 'The Pakistani "banks" and some "financial institutions" "finance" their clients on the basis of….' And 'the "bank" "purports" to sell….'.
As is obvious from the words in quotation marks, and as is the case in reality, there is no sale. There is only credit. For there is no trader. There is a bank, which 'finances' (extends credit to) its clients, not sells anything as such. It only 'purports' to sell. And the bank and the client both know this. The client does not go to the bank to buy goods. He goes there to obtain credit. The real purport of the whole deal is clear to all involved, which is extension credit.5
Those who sincerely believe that devices as Mark-up solve the problem need to analyse the mechanism seriously, and those who use them as subterfuges should know that fancy names as Mark-up and Arabic terms as Murabahah ('Sale on profit'), which were termed as Islamic Fudge even by the Economist,6 can deceive no one for long, least of all God.
As Muslims, we should guard ourselves fully against the trap that the Jews laid down for themselves when they broke the sabbath by violating its spirit with their subterfuges.7
A bank is not into the business of buying and selling goods as such. It is by no means a typical trader, who buys goods, bears the costs and risks of marketing those goods, and typically cannot bind the customers to buy those goods. The bank on the other hand is bound to have this 'buy-back' agreement, not to mention other safeguards as collateral security simply because, not being a trader, it cannot afford the costs and risks that make a trader's business true entrepreneurship. What the trader does is doubtlessly entrepreneurship. What the bank does is without doubt lending. The difference is manifest.
Since the object of analysis in this question is an arrangement of credit, that is the arrangement of a loan for a specific period of time, the gain on that loan at a predetermined rate (which is still expressed in many cases as 'so many paisas per thousand per day' – the way interest rate on working capital loans used to be expressed) is by definition Riba.
It is important to remember that the Islamic jurists and scholars who laid down various rules for Murabahah did not have in mind the Murabahah which is now used as a term for a mechanism of credit extention.8 They had 'sale' in mind.9 The purpose of these rules (laid down not by Shari'ah but by scholars) was to ensure that no element of exploitation (Darar 'aw Gharar: damage or deception) or Riba should creep into a transaction of sale. This cautiousness is important as extension of Riba based credit in the guise of 'credit sale' has always been easy and popular. Whenever 'credit sales' is used as a device to extend a loan, the difference in the prices of 'spot sale' and 'credit sale' becomes indistinguishable from Riba. In fact, the word Riba has been defined as Al-'inah as well as Al-Fadl in 'Aqrabu'l mawarid', one of the most authentic and well-known dictionaries of Arabic. Bay'u'l-'inah (transaction of 'inah) has been explained in this dictionary as follows:
A man asks another for a loan, but the lender is not interested in extending the loan as he cannot charge any extra amount on that loan. So he says: 'I shall sell you this cloth for, say, twelve dirhams [on credit]' while its actual price is ten dirhams. Thus, he gains two dirhrams for that period of time.
It can be clearly seen that, in effect, there is hardly any difference between this form of Riba and the one a bank gets in the name of mark-up.
It is therefore ironic that the precautionary measures suggested by Islamic jurists and scholars to ensure that a sale contract remain free of exploitative elements as damage, fraud and Riba are, intentionally or unintentionally, laid down by many scholars of late as conditions for justifying the extension of Riba based credit.10
An Islamic state reserves the right to prohibit – and indeed gradually and ultimately it should prohibit – all such arrangements as can be used as subterfuges in the above mentioned ways so that it is ensured that Riba does not enter the economy through the back door, just as the Prophet (sws), for the same purpose, gave certain directives regarding barter on credit (see Appendix 2).11
Question: Is there any difference between a Muslim and a non-Muslim in the matter of prohibition of Riba? Can the prohibition of Riba be extended to the loans obtained from non-Muslims, or for that matter, from Muslim foreign countries whose laws and national policies, together with international monetary laws and policies, are not within the control of the State of Pakistan?
Answer: There is no difference between a Muslim and a non-Muslim in the matter of prohibition of Riba. But there is a difference in the one who charges Riba on the loan he gives and the one who gives Riba on the loan he receives.
Essentially, it is taking Riba, rather than giving it, that has been prohibited and condemned in the Qur'an (for example, 2:275-280; 3:130 & 30:39). In none of the related verses, the borrower has been condemned. In fact, the Qur'an strongly urges the lender to deal leniently with the borrower who is in straitened circumstances.
When the borrower has no reasonable excuse to borrow on Riba and he does that deliberately, merely to get an edge, even he is guilty of co-operating in an evil.12
It follows from the points made above that:
a) The Government of Pakistan should fulfil the international financial obligations made in the past as fulfilling the covenant is a religious obligation (5:1), and Pakistan, in its present situation, is not 'co-operating' in Riba, rather as a borrower in dire straits is forced by circumstances to borrow on Riba.
b) The government should gradually try to bring the country out of the situation where it has to borrow on Riba, or even borrow for that matter.
c) The government should also try to reform the society and its institutions to such an extent that no reasonable excuse is left for any one to borrow on Riba.
d) Charging or taking Riba, whether from a Muslim or a non-Muslim, cannot be allowed in any case.
Riba and Government Bonds
Question: The Government of Pakistan and some institutions under its control acquire loans by issuing bonds and certificates etc. and pay a fixed period wise 'profit' to the holders of such securities. Does this profit fall within the definition of Riba?
Answer: The answer to this question again lies in the question itself: 'the Government … and some institutions .. acquire "loans" and pay a "fixed period-wise" "profit"….'
'What's in a name. Riba called by any other name, even "profit", would still smell as foul, were it not Riba called.'
The 'loan' is there. And a 'fixed period-wise' gain is there. Therefore, the gain is obviously Riba.
Although the government is the borrower in such cases and it pays, not receives Riba, it should not use terms that may lead the recipient of Riba to think that he or she is receiving profit, and it should also try to gradually come out of the situation where it has no recourse other than borrowing on Riba to run the country. This obviously requires elimination of corruption and better financial management.
If the nature of the transaction is such that the asset given for a period of time is to be 'used' by the receiver, but, by the nature of the transaction, cannot be 'used up' by him, the predetermined gain would be categorised as rent not Riba.
Mr A leases out his house to Mr B for one year at a rent of Rs. 5000 per mensem. In the third month, Mr B is unable to pay the rent, and, in accordance with the terms of his contract, he has to vacate the premises. To do this, he does not have to 're-create' the building as the nature of the whole arrangement was such that he could not 'use up' the property.
On the other hand, Mr A gives a sack of wheat to Mr C for a certain time period, during which Mr C has to pay Rs. 50 every week to Mr A over and above the value of wheat. Now, in the second week Mr C is unable to pay Rs. 50. In this case, he might have to 're-create' the sack of wheat to return the loan as he might have consumed it, or 'used it up'.
To use accounting terminology, one might say that Riba is charged on circulating capital whereas Rent on fixed capital.
It is also important to note that it is the nature of the transaction, not the nature of the commodity, which determines whether the capital is circulating or fixed, that is whether it can or cannot be 'used up'. For example, a machine hired to produce goods may be categorised as fixed capital as, by the nature of the transaction, it cannot be 'used up', whereas the same equipment borrowed as stock-in-trade for sale by a fellow trader may be categorised as circulating capital as, by the nature of the transaction, it may be 'used up' to generate revenue.
Consequently, one can say that in case of a Riba bearing transaction:
i) there is a gain at a predetermined rate on the loan, and
ii) the nature of the transaction is such that the commodity borrowed can be 'used up' to generate revenue.
It is needles to say that money is a commodity which, by its nature, involves transactions in which the loaned capital sum may be 'used up' by the borrower. Therefore, whenever money is lent, any gain at a predetermined rate on the principal is Riba.
Appendix 2 Ribain Barter on Credit
The Prophet of Allah (sws) is reported to have said:13
If you sell gold on credit, take back gold of the same type and the same quantity; and if you sell silver on credit, take back silver of the same type and the same quantity; for he who gave more or desired more, then this is precisely what Riba is. (Muslim, Kitabu'l Buyu')
If you sell silver on credit in exchange for gold there is the possibility of Riba in it.14 Similarly wheat in exchange for wheat of another type, barley in exchange for barley of another type, dates for dates of another type.15 However, if the exchange is done on the spot, then there is no harm in it. (Muslim, Kitabu'l Buyu')
These directives are meant to prevent Riba from creeping into barter on credit through the back door. It is obvious from these directives that the Prophet (sws) wanted his followers to refrain even from the traces of Riba.
Appendix 3 The Meaning of Riba
Some people argue that only usury (interest at such an exorbitant rate that it exploits the debtor) has been declared unlawful by Islam. Therefore, interest at a mutually acceptable rate can be charged, which is usually the case in loans given for commercial purposes. It is in loans given for the purposes of personal needs that the possibility of exploitation exists. The following verse of Qur'an is presented to support this point of view:
O believers! Do not devour interest, doubling and redoubling.[3:130]
This verse, however, does not support the argument. It merely indicates the gravity of the failing of those who, at a time when infaq (spending in the way of Allah) in relation to jihad (holy war) was affording great opportunities to the Muslims to earn Allah's forgiveness, were busy earning interest. This style is used in a language to reprimand a person for the heinousness of his attitude of not only doing something wrong but also showing total disregard for values in doing so.16 For example, when one says (in English) 'For God's sake, [at least] don't flirt with another woman in front of your wife', it does not mean that one is suggesting that one should flirt with another woman while one's wife is not around. To take an example from the Qur'an, consider the following verse:
Force not your slave-girls into prostitution that you may seek pleasures of the life of the world, if they would preserve their chastity. [24:33]
Obviously, this verse does not mean that if the slave-girls are willing, prostitution may be allowed. It merely points out the intensity of the sin of those who force such slave-girls to prostitution as wish to avoid the despicable crime.
The Qur'an has not defined Riba. It didn't have to. The meaning of the word was already clear to those who understood the Qur'anic Arabic. Just as the Qur'an did not have to define Khamr, it did not have to define Riba. It merely prohibited both. In Qur'anic Arabic, Riba refers to the gain which the lender demands at a predetermined rate from the borrower on the loan that he gives him for a specific period of time. Moreover, it is also clear from the following verse of the Qur'an that those people gave Riba for commercial purposes as well, for it is this form of interest which increases 'in other's wealth', not the interest on loans given for personal needs of the debtor:
And the Riba bearing loan that you give that it may increase in the wealth of others does not increase with Allah; and the Zakah that you give to earn Allah's pleasure, these are the people who shall get manifold [in the Hereafter].
Therefore, if anyone advocates that the word is also used in a sense different from its denotation, the onus of proof is on him.
Furthermore, the following verses of the Qur'an leave no room for the argument that only such Riba was declared unlawful as put the debtor in difficult circumstances:
O you who believe! Observe your duty to Allah, and give up what remains [due to you] from Riba [interest], if you are [in truth] believers. [2:278]
And if the debtor is in straitened circumstances, then [let there be] postponement to the time of ease... [2:280]
These two verses have the same context and therefore can be taken together to show that interest has not been prohibited merely in cases where the debtor is in difficult circumstances. The words 'And if the debtor is in straitened circumstances' indicate an exceptional case, and point out that the prohibition in the previous verse (2:278) is of interest at a normal mutually acceptable rate.
According to Farahi, the particle 'idha' (when) would have been used instead of 'in kana' (if), if the words were not indicative of an exceptional case.17
To take an example from the English language, let us assume that a police officer says to his subordinates 'free all these culprits tomorrow. And if a culprit has helped the police, free him today'. As the context of the two sentences is the same, the second sentence makes it obvious that not all the culprits have helped the police. Similarly, when the Qur'an says: Give up what remains [due to you] from Riba... and if the debtor is in difficult circumstances [let there be] postponement to the time of ease....', it is clear from the second portion that the case of the debtor being in difficult circumstances has been mentioned as an exceptional one. In other words, the prohibition of Riba in the first portion pertains to the general cases of loans given to such people as are not in straitened circumstances. Islahi concludes his discussion on this verse by saying:
Obviously, the affluent would have turned to the money-lenders not to fulfil their personal needs, but, of course, their business needs. So what is the difference between these loans and the commercial loans of today?18
Therefore, it is evident from the Qur'an that interest of all kindshas been prohibited, including that which does not necessarily put the debtor in distressing circumstances, as is the case with interest on commercial loans.