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RIBA IN THE CONTEMPORARY CONTEXT (by Asif Zaidi)

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PREAMBLE

The concept of “usury” termed as ‘Riba” by the Quran has a long historical life, throughout most of which it has been understood to refer to the practice of charging financial interest above the legal or socially acceptable levels. Accepting this broad definition for the moment, the practice of usury can be traced back approximately four thousand years during which period it has been repeatedly damned, proscribed, scorned, and restricted, mainly on moral, ethical, religious and legal grounds. Among its most visible and vocal critics have been the religious institutions of Hinduism, Buddhism, Judaism, Christianity, and Islam.


It is the objective of this paper to intuitively assess the relevance of Islam’s prohibition of Riba to today’s predominantly interest-based global economy.  The scope will not extend to a full exploration of some of the proposed modern alternatives to usury as the purpose is to establish whether or not modern well regulated financial system practices can be termed as usury or riba.

The criticism of usury in Islam was well established during the Prophet Mohammed's life and is reinforced by various teachings in the Quran. The original word used for usury in this text was riba which literally means “excess or addition”.  However, it is not true that this interpretation of usury has been universally accepted or applied in the Islamic world.  Indeed, a school of Islamic thought which emerged in the 19th century, led by Sir Sayyed, still argues for a interpretative differentiation between usury, which it is claimed refers to consumptional lending, and interest which they say refers to lending for commercial investment.

MODERN AVERSION TO USURY

Some may be surprised to discover that Adam Smith, despite his image as the “Father of the Free-market Capitalism” and his general sponsorship of laissez-fair economics, came out strongly in support of controlling usury (Jadlow, 1977; Levy, 1987).  While he opposed a complete prohibition of interest, he was in favour of the imposition of an interest rate ceiling. The great twentieth century economist John Maynard Keynes held a similar position believing that “the disquisitions of the schoolmen [on usury] were directed towards elucidation of a formula which should allow the schedule of the marginal efficiency to be high, whilst using rule and custom and the moral law to keep down the rate of interest, so that a wise Government is concerned to curb it by statute and custom and even by invoking the sanctions of the Moral Law” (1936: 351-3).

Another less well known anti-usury economic reformist was Silvio Gesell (1904), yet  Keynes wrote that the world could learn more from Gesell than from Marx.  Gesell, as a successful nineteenth century merchant in Germany and Argentina, condemned interest on the basis that his sales were more often related to the ‘price’ of money (i.e. interest) than people's needs or the quality of his products.  His proposal of making money a public service subject to a use fee led to widespread experimentation in Austria, France, Germany, Spain Switzerland, and the United States under the banner of the so-called “stamp script movement”, but these initiatives were all squashed when their success began to threaten the national banking monopolies. Margrit Kennedy, a German professor at the University of Hannover, is one of the most vocal contemporary critics of interest who builds on Gesell’s ideas, believing that “interest acts like cancer in our social structure”.  She takes up the cause for “interest and inflation-free money” by suggesting a modification of banking practice to incorporate a circulation fee on money, acting somewhat like a negative interest rate mechanism.

Finally, another school of modern interest critics have their roots in the complementary work of several socio-economic reformists of the early twentieth century, namely Douglas (1924), Fisher (1935), Simons (1948), and Soddy (1926).  Their chief common premise was that it is completely wrong and unacceptable for commercial banks to hold a monopoly on the money or credit creation process.  For banks to then charge interest on money which they had in the first place created out of nothing, having suffered no opportunity cost or sacrifice, amounted to nothing less than immoral and fraudulent practice.  Various alternative systems are proposed by the original authors and carried forward by their modern-day torch-bearers, for example, the Social Credit Secretariat and the Committee on Monetary and Economic Reform.

REASONS FOR THE CRITICISM OF USURY

Throughout the history of the criticism of usury, various reasons and rationale have been forwarded in support of this position. While some are unique to particular traditions or individuals, many tread on common ground, the main ones of which I will attempt to synthesise below.

Usury as unearned revenue

The earliest objection to usury was on the basis that it constituted unearned income, an idea which stemmed from the general doctrine of Just Price. This interpretation included gains sought to be acquired from the use of a thing, not in itself fruitful (such as a flock or a field) without labour, expense or risk on the part of the lender. Thus to live without labour was denounced as unnatural, and so Dante put usurers in the same circle of hell as the inhabitants of Sodom and other practisers of unnatural vice. Perhaps Aristotle had similar sentiments in mind when he argued that “a piece of money cannot beget another”. This is also the argument used to explain why Islam “permits trade yet forbids usury”.

There is an important psycho-political dimension to this argument.  Keynes’ biographer, Skidelsky, intriguingly comments that “Keynes’s sense that, at some level too deep to be captured by mathematics, ‘love of money’ as an end, not a means, is at the root of the world’s economic problem.”

So from this viewpoint usury is what marks the distinction between money being simply a socially contracted abstract mechanism to lubricate between supply and demand, and money as an end in itself. With money as an end in itself, the true dignity and full reward of ordinary labour is compromised.  Money thus becomes self-perpetuating power in itself rather than just a mediating agent of power.  And it is the relentlessness of compound interest in the face of adversity that sets the potential cruelty of usury apart from equity-based return on investment.

Usury as the tool for exploitation

The condemnation of usury in the form of charging for loans to the poor and destitute is a recurring theme in several traditions. Sir Sayyed’s school in Islam similarly interprets riba as the primitive form of money-lending when money was advanced for consumptional purposes.

A parallel modern argument relates to the devastating social impact of the so-called “Third World debt crisis”, a situation which even Pope John Paul II criticized. It is often argued that if sovereign debt during the 1970’s had been advanced on an equity investment basis, debtor countries would not have been caught on the rack of compounding interest at rates established by non-domestic macroeconomic factors.  Servicing costs could not have burgeoned whilst at the same time most commodity prices paid to debtor nations collapsed.  Return on capital and perhaps capital repayment itself, being commensurate with a nation’s economic wellbeing, would have fluctuated in accordance with ability to pay.  The debtor nations would therefore have enjoyed fiscal security akin to that of a low geared company.

Usury as an instrument of unjust redeployment of capital.

The observation that usury acts as a mechanism by which 'the rich get richer and the poor get poorer' is common to several traditions.  Islam rejects financial usury on the basis that it contradicts the Principle of Distributive Equity which its political economy strives to enshrine. Thus any justification of interest as an efficient economic instrument would have to first demonstrate that it functions to increase total utility.

Usury as a means of economic instability

This rationale echoes Gesell’s (1904) main objection to interest in that it is an endemic factor in the instability of interest-based economies, i.e. the cycles of boom and bust, recession and recovery. Even Keynes, the campaigner for interest-based monetary policy, admits the fact that “the rate of interest is not self-adjusting at the level best suited to the social advantage but constantly tends to rise too high.”

Usury as the mechanism for discounting future values

This reason relates to the concept and practice of discounting future values.  The higher the discount rate (derived partly from the interest rate), the faster the resources are likely to be depleted.  Daly and Cobb (1990) take this observation to its logical conclusion and show that discounting can lead to the “economically rational” extinction of a species, simply if the prevailing interest rate happens to be greater than the reproduction rate of the exploited species.  That the net present value rules guide the decision maker to maximise the utility of present generations at the expense of future ones holds true in evaluation of long term investment projects.

ISLAM’S VIEW OF USURY

Given the scant knowledge of history about the practice of financial transactions and lending in the pre-Islamic Arabia, the study of riba remains a challenge for the modern Muslim mind. While some governments and ideologues insist that what they think and have concluded in the matter must be followed, a majority of the Muslims of the world finds it impractical to follow the prohibition of riba as it is mostly preached in the name of religion. The governments also find it difficult to observe the prohibition. I have read a number of giants of Islamic thought of the past century on this subject and have observed that their writings and opinions in this matter are remarkably intelligent but unmindful of modern economics and finance. However, to find fault with what they have opined in abundant sincerity and caution is neither my place nor the idea of this essay. The intent of this discussion is to try and understand what the Quran means by the term al-riba, because only which is forbidden by the Quran should define the scope of prohibition.

As we examine this subject, let’s start by listing down the verses of Quran that are pertinent to Riba.

Al-Baqarah (Sura no. 2)

275. Those who devour riba will not stand (on the Day of Judgment) except as stands one whom the Evil one by his touch has driven to madness. This is because they say: “Trade is like riba”. But Allah has permitted trade and forbidden riba. Those who, after receiving admonition 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).

276. Allah will deprive riba of all blessing. But will nourish acts of charity: for he loveth not creatures ungrateful and wicked.

278. O ye who believe! Fear Allah, and give up what remains of your demand for riba, if ye are indeed believers.

279. If ye do it not, take notice of war from Allah and his Apostle: but if you repent ye shall have your capital sums: deal not unjustly and ye shall not be dealt with unjustly.

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.

281. And fear the day when ye shall be brought back to Allah. Then shall every soul be paid what is earned. And none shall be dealt with unjustly.

Al-e-Imran (Sura no. 3)

130. O ye who believe. Devour not riba doubled and re-doubled but fear Allah: that ye may (really) prosper.

Al-Nisa (Sura no. 4)

160. For the iniquity of the Jews we made unlawful for them certain (foods) good and wholesome which had aforetime been lawful for them: because they had blocked off many from Allah’s way.

161. Since they took riba though they were forbidden: and that they devoured men’s possessions wrongfully: we have prepared for those among them who reject faith a grievous punishment.

Al-Rum (Sura no. 30)

39. That which ye lay out in riba so that it may increase through the property of (other) people, will have no increase with Allah: but that which ye lay out for charity, seeking the Countenance of Allah (will increase): it is these who will get a recompense multiplied.

Riba literally means increase or gain. Only one kind of riba out of two kinds (riba al-nasia and riba al-fadl) has been banned by Quran. The riba banned by Quran is riba al-nasia which refers to the monetary benefit that accrues on a debt. This signifies the form of loans that was practiced in Arabia before Islam and hence is also referred to as riba al-jahiliya. The undue gain in sales and exchanges was forbidden by the Prophet and it is known as riba al-fadl. According to modern scholars like Maududi and Mufti Muhammad Shafi riba al-fadl applied to the type of transactions in the then barter system and such transactions are no more in vogue.

The Quran refers to riba with a definite article ‘al’, which indicates that it refers to the practise of that riba, on loans, which was followed at the time of the advent of Islam. That is why while the Quran condemns riba, it does not describe its practice and mechanics. The Ahadiths (traditions/sayings of the Prophet) also do not provide any explanation in this regard. In his book Masla-e-Sood, Mufti Mohammed Shafi has quoted forty seven Ahadiths which refer to the prohibition of riba. Not one of them explains what riba al-jahiliya was. The Quran though does indicate that the increase in the amount owed was enormous (Al-e-Imran 130) and that there was wickedness, grave injustice (Al-Baqarah 276 & 279) and iniquity (Al-Nisa 160). There is no further indication whether this amount increased after the default or was it the capital amount that doubled and redoubled itself. The Quran simply names the transaction that is banned by it as al-riba, while it permits trade. This means that it refers to a practice that was clearly known to the old Arab society and was understood by all at that time and therefore the lack of a description of the term did not entail any ambiguity for them. The Quran also enjoined that the practice in question must be stopped forthwith; asking such creditors to give up whatever amount of riba was outstanding when the prohibition was issued (Al-Baqarah 278). It can be argued with conviction that the most striking attribute of the transactions that involve riba according to the Quran is injustice (zulm) thus establishing the intent to avert the cruel exploitation of the needy by the rich and the powerful. Therefore, the onus for compliance rested on the rich money lenders and not on the weak borrowers. This is further corroborated by the fact that immediately after the revelation of these verses the same language was used by the Prophet against the landowners who lease out land to tillers on unjust income sharing conditions. Little surprise that largely feudalistic societies adopt a very different approach towards this ban than towards the ban of riba.

When the Muslim empire expanded soon after the death of the Prophet it came into contact with the financial transactions that were not entirely similar to those practised in Mecca and Medina. Confronted with the task of defining precisely as to what exactly constituted riba, the great Second Caliph observed that the Prophet had passed away before fully explaining the implications of the Quranic verses in the matter of riba since he did not live long enough after the revelation of these verses. The Second Caliph thus acknowledged the situation that neither the Quran nor the Prophet has explicitly told us as to what precisely are the transactions barred as a result of the prohibition of riba. The Second Caliph’s simple and practical advice in the matter was to shun all transactions regarding which there may be doubt that riba is involved in them. This reflected Umar the Great’s immaculate piety and austere temperament. He neither enforced this by state action nor ever claimed that he had removed the doubt that existed in the matter. The abstinence practised by him and his companions was voluntary in its character. The doubt survived him and so did the recommendation that one should shun all that seems doubtful. Umar the Great’s stern consciousness of the prohibition has largely been followed by the pious of the Ummah after him without trying to minimize the zone of uncertainty highlighted by him. Therefore, throughout the history a greater emphasis has been laid on avoiding doubtful transactions than on developing a lucid understanding of the prohibition. The scholars focused more on identifying doubts regarding the eligibility of transactions than on removing those doubts or modifying the transactions. Thus whereas Umar and his companions’ doubts were a genuine product of their ever watchful minds, in the times following them they became largely imitative in the absence of any significant efforts to examine and remove them. While all the great and brilliant scholars from Al-Ghazali to Maududi have delved into the subject, the Muslim thought even today presents no consensus on the transactions involving riba that can be applied in modern day’s greatly changed markets, economic conditions, and social circumstances. The interpretations of these great scholars in this matter can be respected as formulations of juristic thought pertaining to their times but cannot be accepted as eternally binding.  Especially as the evolution of economic, financial, and fiscal systems, laws, structures, and instruments has far surpassed what even the wisest of men could have imagined several hundred years ago. All human societies attempted to deal with economic problems as mainly moral and ethical matters, as the principles of economics were not known. It was long after Adam Smith that in the West economics became a separate and vast branch of knowledge independent of religious considerations. Whereas some Muslims are still trying to deal with economics as a topic under the aegis of Fiqh that was developed twelve hundred years ago.

The excessive focus on prohibition has led to the proliferation of often coarse contrivances that when closely examined are no different from other modern day financial transactions. An example is the self-styled Islamic Banking system implemented in Pakistan under Zia’s watch. The methods often used are flimsy excuses such as purported sale-purchase transactions involving payment of pre-determined profit margins exactly equal to what normal banking interest applicable to the transaction would amount to. These contraptions are endorsed by religious scholars as shields against the sin of paying and receiving riba. This has though created a fast growing market in which wily operators are making hay.

ARE MODERN INTEREST AND RIBA ENTIRELY SIMILAR?

Our general attitude has been to enlarge the scope of prohibition as a protection from Allah’s anger, as promised in the Quran, against those who practise riba. This at best can be described as the next best course of action to determining what exactly is the practice of riba that was rife in pre-Islamic Arabia and has been prohibited by Allah. Reformers who set out to condemn interest vividly depict severe hardships caused to the debtors by unscrupulous and abusive creditors. In doing so they often describe the plight of extremely poor and needy borrowers of the times, several hundred years ago, when one could not have conceived the thriving, productive, and powerful commercial borrowers of the present age. Mufti Muhammad Shafi Sahib points out the difference between riba and interest (sood) as follows:

“The thing which has been referred to as riba and prohibited by the Quran has been translated as sood into Urdu owing to the poverty of its vocabulary. As a consequence an impression has been created that the words riba and sood refer to the same category of transactions but it is not so in reality.”

The basic concepts conveyed by two words are different. While the Arabic word riba literally means ‘increase’ the Persian word sood means profit. Hence when we talk of what was prohibited by Quran we should use the Arabic word riba in Urdu just as we use terms like Qibla, Maghreb, Fajr etc. The word riba is more often translated into English as usury than interest. Even usury is not an exact translation but may be accepted for want of a better translation. As we have seen above, the word usury denotes charging unconscionable interest in an exploitative manner rather than purely market driven, competitive, and pre-agreed interest which is the underpinning of the modern financial transactions. In today’s sophisticated financial markets, much of the borrowing and investment activity is undertaken without the intermediation of banks. This is primarily driven by the factors of demand and supply influenced by variant such as various risks associated with the transaction, market liquidity etc. This includes capital market debt instruments of various kinds and the players ranging from governments and corporate entities on the issuer side to hedge funds, mutual funds, individuals, and other investors on the investor side. Hence the modern day interest is loosely like paying the rent on the use of an asset. In that context there is little difference between paying and receiving the rent, derived from the monetary value of the asset in question, on a house or car and paying the rent on the money used to buy these assets. In underdeveloped financial systems the governments can appoint watchdogs to ensure that the banks’ interest rates represent the true economic cost of money and do not turn exploitative and exorbitant, into what is often termed as usury, for the weaker borrowers which lead to exploitation that the Quran and the Prophet have forbidden. A lot of confusion has also stemmed from using the word interest in the translations of the Quran as a result of which the thought of a common Muslim becomes hemmed in by the connotation of the word interest (or ‘sood’ in Urdu) in oblivion to its considerable dissimilarity with the authentic term which is al-riba. Since we have equated al-riba to the well understood term of interest, there has been little research and investigation to find out what precisely al-riba was. Thus real solution to the quandary is to investigate and establish accurately what al-riba was by probing deep into the history of that period while keeping in mind its characteristic features which the Quran has marked out for us.

The foregoing makes it clear that it is unfair to insist that the conceptions of riba and interest are exactly the same. This misleads good Muslims who strive to avoid riba and thus widens the scope of prohibition rather than applying it in its accurate intent and purpose. Impartial observers, with good reputation for their objectivity and knowledge of Islamic thought, like J, Schacht and Maxime Rodinsen have noted in the ‘Shorter Encyclopaedia of Islam’ and in ‘Islam and Capitalism’ respectively that the Muslims have not been able to properly decipher the concept of riba banned by the Quran. They opine that riba does not appear to signify mere interest as it is used today, but rather, the doubling of a sum owed (in money or in kind) when the debtor cannot pay it back when it falls due.

The primitive Arab practice of Riba had little in common with present day interest which represents a fixed percentage and whose rate is determined by macroeconomic factors, processes of money markets, and the interplay of supply and demand. This mechanism has no relevance to the notion of riba al-jahiliya. At the advent of Islam there were hardly ten or so people in Quraishs of Mecca who could read and write and not many people were capable of counting beyond seventy. Therefore it would be wrong to assume that these people could have a practice of charging a price for lending money anywhere nigh the modern style of computing it precisely on the basis of a pre-agreed percentage. In fact the modern concept of interest is not more than a few centuries old as it found its beginning in the rise of trade and commerce in the 16th and 17th centuries. It has taken centuries to evolve in tandem with the economic conditions. In the old times the uneducated minds were prone to penalising the debtor by doubling the demand rather than making calculation of fractions as the present day application of interest demands. For example, not up to very long ago, in the backward parts of undivided India grain was an important means of exchange and an important yardstick for deferred payments. Farmers borrowed sowing seed and food for the repayment at next harvest. The usual repayment was double the quantity borrowed. In the modern terms this would exceed 100% per annum, considering that the number of months until the harvest would always be less than 12. Similar practices –involving agricultural produce, commodities, cattle, and other assets- flourished in other parts of the world. Even today an undeveloped mind would find it convenient to think in simple terms such as ‘doubling and redoubling’ and would need much greater effort to grasp an increase in fractions based on a percentage. This practice of ‘doubling and redoubling’ in pre-Islamic Arabia has been described in Muwatta of Imam Malik, in Tabri, and in the books of other Muslim scholars. Sidney Homer, in his notable book ‘A History of Interest Rates’ has provided many examples of doubling the interest rates in olden times. Similarly in some societies like Babylonia, Rome, and Greece, the insolvency of a debtor would result in slavery.

As said at the start of this essay, there exists a very scant account of the history of ancient Arabia as there is no record of written history in pre-Islamic era of what then constituted Arabia. {As described in Encyclopaedia Britannica and by the historians, the term “Arab” was expanded to include the adjoining nations when the Muslims conquered the entire peninsula and North Africa}.    What the Quran has noted and prohibited was perfectly in accordance with the tendency of primitive societies such as Arabia prior to Islam, as the Holy Book is talking of the conditions that existed in Arabia before the advent of Islam and not of the conditions that developed afterwards. While the Quran has not explained what the riba al-jahiliya was, it has revealed some of the characteristics of the transactions it has prohibited.

Verse 279 of Sura Al-Baqarah says:

Deal not unjustly,

And ye shall not

Be dealt with unjustly.

Hence the word ‘unjustly’ defines one of the characteristics of riba al-jahiliya.

Then the verse 130 of Al-e-Imran says:

O ye who believe!

Devour not riba

Doubled and redoubled

But fear Allah, so that

Ye may (really) prosper.                                             

Here the word ‘devour’ gets across the idea of extorting huge amounts and swallowing them rapaciously whereas the words ‘doubled and redoubled’ define unconscionable benefit.

Then the verses 160 and 161 of Sura Al-Nisa express displeasure against Jews for indulging in the evil. Two characteristics are exposed by mentioning riba as an example of Jews’ ‘iniquity’ and of their habit of devouring men’s possessions ‘wrongfully’. The Jews are reproached here for the vice of inflicting hardships as well as wrongful usurpation of the property of others. These, indeed, are the characteristics of riba. Thus the injurious characteristics of al-riba can be summed as wickedness (2:276), injustice (2:279), the cruelty of doubling and redoubling the benefit (3:130), iniquity (4:160) and wrongful usurpation of others’ properties (4:161). It is the transactions with these attributes that are banned by the Quran and not the practice of lending and borrowing money itself.

Hence, unless the benefit earned from a loan has the characteristics which the Quran has ascribed to riba al-jahiliya it cannot be automatically denounced. It is clear from the above that the language does not fit the modern concept of interest which is charged, with mutual consent, at a predetermined percentage of the loaned amount. Any increase is either in line with the market benchmarks or is calibrated in percentages without conferring upon the creditor the right to arbitrarily double or redouble the dues. Therefore we need to be to careful to not to overlook the features of riba al-jahiliya as described by the Quran rather than giving their place to a different and irrelevant concept of interest or ‘sood’ which, as practiced in modern finance, is vastly removed from the practice denounced by the Quran. The bane of the entire situation consists in dissembling rather than investigating with an open mind to establish the truth.

To conclude, we have seen in the foregoing discussion that al-riba as practised in pre-Islamic Arabia and banned by the Quran was by no means a system of charging interest in the sense the concept and usage of interest is understood and applied in today’s world.

Selected Bibliography

Mufti Muhammad Shafi:                                    Masala-e-sood

Maulana Abul Ala Maududi:                               Sood; Tafheem-ul-Quran

Ayotullah Nasir ul Makarim Shirazi:                    Tafseer-e-namoona

Ayotullah Baqar-us Sadar:                                 Humarey Iqtisadiyaat

Imam Muhammad Rashid Raza:                        Interest and Dealings in Islam

Maxime Rodinson:                                            Islam and Capitalism

Muhammad Asad:                                            The Message of the Quran

Wayne Visser & Alastair Mcintosh                     A Short Review of the Historical Critique of Usury

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