Interest: The
Islamic Perspective
By Syed Osman Sher
Mississauga, On.
Canada
The Muslims world
is facing numerous challenges today. While meeting
these challenges in accordance with the needs of
the time, it has to be ensured that the customs
and practices so adopted should not be in conflict
with the sacred law. The Shariah, on the other hand,
is not meant only to show the right path but also
to make life easier for its followers. The Quran
says: “God doth wish to lighten your (difficulties),
for man was created weak.” (4:28). Islam gives
freedom and full play to man’s faculties of
every kind.
Islam encourages man to enjoy the good things in
life bestowed on him by God: “O Children of
Adam! Wear your beautiful apparel at every time
and place of prayer: eat and drink: But waste not
by excess, for Allah loveth not the wasters. . .
Say: Who hath forbidden the beautiful (gifts) of
Allah, which He hath produced for His servants,
and the things, clean and pure, for sustenance?”
(7:31-32). It preaches for a practical life: “Surely,
Allah does not change the condition of a people
until they change their own condition” (13:11)
One of the issues posing serious challenges to the
Muslim world today is ‘usury.’ Let us
start with the following verses of Quran, and examine
this issue from different angles.
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 Allah hath permitted trade
and forbidden usury. Those who after receiving direction
from their Lord, desist, shall be pardoned for the
past; their case is for Allah (to judge); but those
who repeat (the offence) are companions of the Fire:
They will abide therein (for ever). . (2:275)
O ye who believe! Fear Allah, and give up what remains
of your demand for usury, if ye are indeed believers.
If ye do it not, take notice of war from Allah and
His Messenger: But if ye turn back, ye shall have
your capital sums: Deal not unjustly, and ye shall
not be dealt with unjustly. (2:278-279).
Concept and Definition: The first task in this regard
is to get at the meaning of ‘riba,’
the word used in Quran, or the English equivalent,
‘usury’. Unfortunately, the Muslim world
has not yet converged on a point to finally agree
on the definition of riba. However, pushing ‘usury’
in the background, interest has taken the position
in the forefront. The result is that these days
the word ‘interest’ has become synonymous
to usury, or the two have become interchangeable.
Starting with this premise, we have to first understand
what interest is. And, for this we have to know
what ‘production’ is. Production is
the creation of utility in a thing. If a piece of
land is lying fallow, but if a farmer ploughs it
and grows food from it he has undertaken production,
because he has instilled utility in that land. If
somebody fills up air in a balloon, he has produced
utility in the balloon, as well as in the air which
would not have otherwise been utilized. If a water
carrier fills up his cask with water at the river
and brings it to the doorstep of somebody who is
in need of water, he has created utility in the
water, which would otherwise have fallen into the
sea. In other words, they have undertaken ‘production.’
Utility is added to a thing in many ways like when
cotton is turned into yarn, or yarn is made into
thread, or thread is woven into cloth, or cloth
is brought to the shop, or when it is ultimately
sold to the consumer. All these stages have resulted
in production, of goods and services, because every
time utility has been added.
Production is carried out by four factors: Organization,
land, capital and labor. In the absence of any one
of them, production will not be possible. For instance,
our balloon vender has to organize a system to start
a business. He has to stand up on a piece of land
to carry his trade. He would need money or capital
to buy balloons and a pump. In the end he would
put his labor for pumping the balloons with air
and for selling them. We see in the end that the
balloons have become useful for entertaining children
or for decorating party halls. The balloon vender
has either to provide all factors of production
himself, or for earning a profit as the entrepreneur
he embarks on a risky venture which involves taking
a shop on rent, borrowing money on interest to buy
balloons and a pump, and hiring a laborer on wages
to fill the balloons and to sell them. He has to
pay each factor of production its reward in the
shape of profit, rent, interest and wage. Even if
all the resources are owned by the entrepreneur
and he takes away all the rewards himself, the respective
reward of each factor of production will be hidden
in what the entrepreneur has got.
Each factor, which participated in the production,
has been given its recompense. It is a system where
justice has been done to all. But if there is a
system in which enterprise, land and labor are paid
their reward but it is denied to the capital, will
it be termed as just? Can any religion or philosophy
that preaches such a principle be acceptable as
fair and sound? No. We now proceed further. If the
other three factors agree to participate in the
process of production in the hope of getting, in
return, the fruits of their efforts, why the fourth
factor, the capital, would agree to participate
in it if it has not to receive any reward? And.
in the absence of capital, production would not
take place. Can then the payment of recompense to
the capital be termed as ‘devouring men’s
wealth wrongfully’? Does Islam as a religion
preach a philosophy which, if implemented, would
put a brake on the process of production, the essential
element for the continuation of life? Again, No!
Thus, Islam in no way seems to have banned the interest
as described above. The question then arises: what
has been prohibited by Islam in the name of usury?
There is, however, one situation under which a man
may agree to lend his money to others without compensation,
although it would not be a comfortable situation
for him because it involves both pain and risk.
And, that situation is to help someone in need or,
in other words, to give in charity. Charity is one
of the cardinal teachings of Islam. This is a plane
on which people may be ready to sacrifice, and also
feel pleasure instead of pain. People have been
enjoined in Islam time and again to give charity
openly and secretly. In addition, charity has been
prescribed in the form of zakat. It is meant for
rescuing people out of personal predicaments or
extreme hardship, for example, to meet their basic
needs as hunger, etc. In such a situation if one
wants to make a capital of someone’s pain
and suffering, and to earn income from a loan, his
action would not conform to the Islamic principles
of charity and sacrifice. Such a gain may thus be
conveniently termed as riba. All agree that riba
means an increase over and above the amount what
had been lent. And, scholars also agree that there
is room for differences in defining as to what kind
of such increase should be called ‘usury’
According to Ibn Khatir, Hazrat Umar, the second
caliph, had also felt some difficulties in this
regard. But, before this question was settled the
Prophet had died.
Human needs are as old as the man himself. They
arise when he is born, and so arises simultaneously
the instinct in others to help and support him,
either free or with a price. In such a situation
what rightful attitude one should adopt was taught
as early as the time of writing of the Old Testament:
And in case your brother grows poor so he is financially
weak alongside you, you must also sustain him. As
an alien resident and a settler, he must keep alive
with you. Do not take interest and usury from him,
but you must be in fear of your God; and your brother
must keep alive with you. You must not give your
money on interest, and you must not give your food
out on usury. (Leviticus 25:35-37)
An important thing to note here is that in the Old
Testament the word ‘interest’ is used
for lending money while ‘usury’ is used
for lending food. But both the terms have been used
in the context of helping people in extreme difficulties.
Quran’s commandments must not be different
from what God had asked the Jews to practice. The
Quran attests the Old Testament in verse 4: 161:
“That they (the Jews) took usury, though they
were forbidden; and that they devoured men's wealth
wrongfully; we have prepared for those among them
who reject faith a grievous chastisement.”
In the pre-Islamic days the people of Arabia were
not all Jews, but the practice of lending money
was very common. Naturally, at that time not much
of others’ money might have been needed for
conducting one’s trade. If one had his own
resources he started his own business, otherwise
he took to other occupations. Loan was obtained
mostly for mitigating personal hardship. The loans
thus extended without exacting a price must have
been deemed as charity, otherwise it was usury.
For this reason, charity and usury have been mentioned
side by side in the verses 2:276 (Allah will deprive
usury of all blessing, but will give increase for
deeds of charity: For He loveth not creatures ungrateful
and wicked), and 2:280: If the debtor is in a difficulty,
grant him time till it is easy for him to repay.
But if ye remit it by way of charity, that is best
for you if ye only knew. Charity and usury stand
in equal stead but apposed to each other. If one
helps the needy it is charity; if he charges a price
for his help it is usury. Quran commands giving
in charity but prohibits usury.
Justice and Pragmatism: Further, at the time of
the rise of Islam loans were extended in the form
of gold, silver, and food grains. They were loaned
in kind and repaid in kind. Let us assume that any
amount additional to the principal, lent for mitigating
hardship or even for business purposes, is usury.
In those days, the value of gold and silver remained
constant. The prices of commodities also did not
change. They were not as volatile on the upward
side as they are today. If no additional amount
was paid in those days at least the lender received
back his loan in the same coin with full value.
But today transactions are made mainly in terms
of money. Also, loans are generally made on long-term
basis. For instance, today governmental loans from
foreign countries and agencies are contracted with
a repayment period of even twenty-five years, or
more. The value of money decreases day by day. In
this situation, if an additional amount is not paid
along with the principal after the lapse of a few
years this would be tantamount to paying less than
the principal. The lender would thus be a loser.
Does Islam ask the people to receive back their
principals with a diminished value? Is it justice?
A reasonable additional amount seems justified today
at least to equalize the value of the money when
it was lent. Then a risk is also involved in such
transactions, the risk of non-payment. Thus the
payment of an additional amount is also a sort of
insurance premium against that risk. If the condition
of additional payment, over and above the principal,
is not there, who would lend his money to others,
unless it is a case of pure charity? A reasonable
rate for this purpose thus seems justified but,
of course, not doubled or tripled as has been prohibited
by verse 3:130. (O ye who believe! Devour not usury,
doubled and multiplied; but fear Allah; that ye
may prosper)
Welfare and Exploitation: Initially, the Quran was
given to the people of Makkah and the people around
that city: “Thus have We sent by inspiration
to thee an Arabic Qur'an: that thou mayest warn
the Mother of Cities and all around her, and warn
(them) of the Day of Assembly, of which there is
no doubt: (when) some will be in the Garden, and
some in the Blazing Fire (42:7). But today’s
world is not limited to that environ. It is a totally
different sky. Now transactions, involving setting
up of industries, carrying out international trade,
establishing social institutions, building infrastructures
etc., take place not in thousands but in unimaginable
magnitude of billions of billions of currency units.
Modern economic machinery of diverse nature like
banking and interest, insurance and re-insurance,
stock market and currency exchange, and so on, performs
this function. The whole structure of modern-day
economic prosperity and wellbeing is standing on
the pillars provided by such economic instruments.
Remove them and the wheels of progress will not
only stop but the whole system would collapse, destroying
everything in its wake, even the civilization of
today.
It is natural that whatever money one earns is not
totally spent, unless he is hand to mouth. The propensity
to consume always remains below the income line.
The resulting saving is thus channeled through the
modern banking system into investment. The propensity
to consume with the resultant savings gives birth
to the multiplier effect of economic theory meaning,
in simple terms, a multiple growth in the economy.
Again when savings are deposited in banks, the depositors
do not withdraw all the savings at a time. Working
on the basis of the average withdrawal, the banks
then create, with the amount left with them, many
times more credit than the original deposit. They
are channeled in still more investments.
On the other side, it is not possible that all the
savings accruing in an economy could be mobilized
into investment optimally by individual efforts.
For investment purposes, loans are not only obtained
by individuals, but by small businesses, multinational
enterprises, and commercial undertakings. Even governments
acquire loans from their own citizens, from multi-national
banks and from other countries. Big and small businesses
and projects of economic and social development,
like roads, bridges, airlines, railways, airports,
residential complexes, telephone lines, TV and Radio
stations, schools, hospitals, museums, parks, libraries,
etc., are established mostly out of loans, which
come out of this pool of savings collectively created
by the individuals or corporations. Even maintaining
an army for the defense of the country sometimes
needs foreign loans. It is also needed even for
procuring necessary items of consumption from other
countries. If savings are not invested in this way,
and are simply hoarded in closets, the economic
engine will fail. This hub of economic system, called
loan or inversely interest, is such a mighty force
that it pervades all over. This engine is pushing
economic activities in all directions.
It is commonly seen that some Muslims, in reverence
to the Quranic injunctions, do not obtain loans
from the banking system even for such essential
facilities as for owning a house or a vehicle. They
do not like to be sinners by paying interest. It
must be realized, however, that for the use of a
service or the consumption of a commodity the price
is paid by the ultimate consumer, and not by the
original provider of the facility or by the middleman.
So whatever price we pay for using a good or service
includes the portion of that interest, which has
been earlier obtained by the provider of the facility
For example, if I take a house on rent, the rent
paid by me will include the interest which the builder
has to pay for his loan. It is also hidden even
in the prices or fees we pay for the goods and services
of daily use, because they have been produced by
using the capital obtained generally through loans.
Sometimes, the government pays the interest for
its loans through the revenue collected through
taxes, and the tax is paid by the citizens. Can
then any person claim that his life is not polluted
with interest, and so he would not obtain loan on
interest for increasing his welfare?
On the basis of the verse 4.29 (Eat not up your
property among yourselves in vanities: But let there
be amongst you traffic and trade by mutual goodwill)
Abul Ala Maududi argues thus against the modern-day
interest: “Islam does not confer an open license
to its follower to earn wealth in whatever manner
he likes. Instead, it establishes a norm of lawfulness
and otherwise in the ways of earning wealth keeping
in view the collective welfare (of the society).
This norm is based on the principle that all those
methods of earning wealth are unlawful in which
one person’s gain is obtained at the cost
of the other, and that all those methods are lawful
where mutual gains are based on justice to both
the parties” (Islam Aur Jadid Maashi Naazariyat
by Abul Ala Maududi, p. 97, published by Islamic
Publications Private Ltd. Lahore, Pakistan).
To the contrary, the interest as prevailing today
does not entail eating away of the property of one
by the other. This sort of traffic is carried out
with mutual consent, not under coercion, and with
full understanding that it would prove to be mutually
beneficial and would be contributing to the well-being
and prosperity of both the parties. Barring rare
cases of failures, in fact, it does so. It should
not, therefore, be termed as exploitation by one
party of the other.
How the interest is providing economic progress
has been recounted above. At individual level too
it is promoting welfare. Due to this arrangement
people are becoming homeowners. They are able to
have their own vehicles without which it might not
be possible either to get a proper earning, or to
reach the workplace in big cities, or to carry big
or small business and trade. In this connection,
Abdullah Yusuf Ali has commented: “Our Ulema,
ancient and modern, have worked out a great body
of literature on usury, based on economic condition
as they existed at the time of Islam. I agree with
them on the main principles, but respectfully differ
from them on the definition of usury. The definition
I would accept would be undue profit made, not in
the way of legitimate trade, out of loans of gold
and silver and necessary articles of food, such
as wheat, barely, dates and salt (according to the
list mentioned by the Holy Apostle himself). My
definition would include profiteering of all kinds,
but exclude economic credit, the creature of modern
banking and finance.” [Abdullah Yusuf Ali,
The Holy Quran (Arabic text with English translation
and commentary), Beirut, 1968, p. iii.]
Based on the Quranic injunctions on riba, ijtehad
has been done and principles formulated such as
musharika, mudariba, and even no profit/no loss
banking system.
It needs to be examined whether such systems are
really in accordance with the spirit of the Quranic
injunctions of avoiding exploitation, or are just
dressed in a camouflage. Are they really an improvement
over the existing system? Do they meet the needs
of the time fully? Can they be inter-changeable
with the existing economic order? Is new ijtehad
required in this regard, keeping in view the well-known
legal principle that ruling once given can be changed
according to the situation?
Receipt and Payment Another issue which needs further
examination is that whether usury has been prohibited
as a receipt only or also as a payment. One may
argue that if receiving usury is evil, its payment
should also be bad. Not necessarily! If harming
others is a sin, to get harmed should not be a sin.
If exploitation is bad, blame should not be put
on those who are exploited by others. Receiving
of usury is definitely a sin because it is a sort
of extortion for extending help to another person
or, in other words, it is oppression. In all the
verses quoted above the exaction of usury is prohibited,
including in the Old Testament as mentioned above.
However, in verse 30-39, the Quran says: “That
which ye give in usury in order that it may increase
on (other) people's property hath no increase with
Allah; but that which ye give in charity, seeking
Allah's Countenance, hath increase manifold”
Here the word riba (usury) is used here in the sense
of giving by way of bribe. Commenting on the Verse
30:39, Abdullah Yusuf Ali says: “According
to commentators this verse specially applies to
those who give to others, whether gifts or services,
in order to receive from them greater benefits in
return. Such seemingly good acts are void of any
merit and deserve no reward from Allah, since He
knows the real intention behind such ostensibly
good deeds.” (The Holy Quran, English Translation
and Commentary by Abdullah Yusuf Ali, p.1189, footnote
# 3552, The Presidency of Islamic Research, IFTA,
Mushaf Al-Madinah An-Nabawiyah). So here giving
of riba does not mean paying interest, but bribery.
The fact that usury, even if it is interest, is
prohibited by way of taking, and not giving, also
becomes clear from the following words of the last
sermon of the Holy Prophet: “Allah has forbidden
you to take usury, therefore all interest obligations
shall henceforth be waived. Your capital is yours
to keep. You will neither inflict nor suffer any
inequity. Allah has judged that there shall be no
interest and that all the interest due to Abbas
ibn 'Abd'al Muttalib [the Prophet's uncle] be waived.”
The Prophet did not ask his ummah not to give interest
in future but to waive what they had earned and
to keep the principal.
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