Prohibition is on Usury – not Interest

Usury is prohibited in Bible as well as in Quran. The word `riba' as appearing in Holy Quran is translated in English as `usury' by some translators and as `interest' by some. See relevant verses of Holy Quran and Hadiths at  

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The word "Riba", in Arabic language, literally means an "increment' or addition". In Islamic Fiqh the term riba has a special meaning. Riba is an unjustified increment in borrowing or lending money, paid in kind or in money above the amount of loan, as a
condition imposed by the lender or voluntarily by the borrower. Riba defined in this way is called in Fiqh riba al-duyun (debt usury). Riba also is an unjustified increment gained by the seller or the buyer if they exchanged goods of the same kind in different quantities. This is called "riba al-fadl" or "riba-al-buyu" (trade usury). 
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After reading the hadiths it can be said that riba is not necessarily time related. It is an excessive increase. Riba is exploitation or forced addition; but voluntary extra return from the beneficiary may not be regarded as Riba.

The question often debated is that whether the interest as charged in the modern banking and financial institutions can be regarded as "riba", which is strictly forbidden in Islam. Interest is payment made for the use of money borrowed or taken on credit. Usury denotes an excessive or illegally high rate of interest charged on borrowed money.  Many scholars of Islam including those of Al Azhar University of Egypt opined that where interest rate is mutually agreed or where it is regulated by the Government it cannot be treated as riba or usury. The provision to cater for administrative expenses of the lending institution and the loss of purchasing power of money due to inflation cannot be regarded as riba. Moreover under verse 2.279 return of principal sum is allowed and protected and the inflation cause decrease in principal value in terms of purchasing power of paper currency.

Profiteering and Interest

We see every day how profit is charged by the traders. The difference between legitimate profit and profiteering is not well defined. One shopkeeper may sell a television (supplied by the manufacturer at the net price of RS. 20, 000) for 24, 000 but the other shopkeeper may sell it for RS. 27, 000. Yet another shopkeeper may sell it for 12 monthly installments of RS. 3000 (aggregating to RS. 36, 000) In all these transactions there is profit but not riba. But supposing the purchaser takes a loan of RS. 24000 to buy the television and repays loan with RS. 3600 interest for one year, the orthodox ulema say that the bank is taking riba even though the bank is helping the borrower to buy the Television at lower cost than that charged by the shopkeeper selling it in 12 monthly installments of RS. 3000/-  

Now let us have a look at another case.  Zaid acquired a loan of RS. One million from his friend for building a house. At that time the gold was worth RS. 50 per gram. The loan was treated as 20, 000 grams of gold and it was agreed that every year Zaid would give 1000 grams of gold to repay the loan and thus the loan would be redeemed in 20 years. Examined in the light of different fatwas there is no element of Riba in this agreement and it is admissible under Sharia. 

On the same date Bakar is sanctioned a Loan of RS. One Million by a bank on the interest rate prevailing at the time and he has to pay the annual installment of RS. 90, 000. Thus in 20 years he would be paying over RS. 18 Lacs for a loan of RS. 10 Lac and the excess of over RS. 8 Lace is considered RIBA by many. (The annuity of RS. 90, 000 per annum would accumulate to much bigger amount than 18 Lacs depending upon the interest earned by the bank.) Supposing this was interest free loan for RS. 10 Lac with annual installment of RS. 50, 000 for 20 years, how the lender would be compensated for loss of purchasing power of money under the installments paid? Will it not be unjust? In verse 279 of surah 2 the need for justice for both the borrower and the lender is prescribed. Some people opine that an agreement under verse 2/282 can include compensation for use of money and that cannot be regarded as riba but this view is not accepted by the majority.  .

Now let us examine the predicament of Zaid. He is experiencing the increase in the price of gold every year. In the 20th year his last installment of 1000 gram of gold would alone cost him several Lacs in gold purchase and he ends up by paying over 35 Lacs in gold purchases to redeem his loan, which was worth only RS. 10 Lacs 20 years ago and the excess of 25 Lacs that he spent on gold cannot be regarded as Riba as what he has paid back is 20, 000 grams of gold. 

This example leads most of the people well versed with Islam and economics to believe that the provisions for loss of purchasing power of the rupee, administrative expenses and a reasonable profit cannot be regarded as riba as we are following "a managed paper currency system" without any backing of gold or other commodity which by itself entails the elements of Riba in indirect manner.

The intent and purport of the verses regarding riba would appear to stop exploitation of the poor by the rich. Credit facilities provided by the banks have helped in expansion of trade and industry as well as helped the poor to start their own business ventures. The state of business activity within a country at any given moment may be gauged from the condition of the credit system: There are several types of credits and most of them would not be viable if reasonable interest is not allowed and the growth of economy would be stifled.

Most economists agree that expanding credit generally reflects a period of business prosperity, whereas contracting credit usually reflects a period of declining economic activity or depression. In the developed countries laws are enacted to regulate banking interest rates and the bank and money lenders cannot charge interest more than permitted by the laws.

Arif Khan