Let us try first to understand what Ribā or interest is, according to the Qur’an and the Sunnah. What are its parameters? What are the specific cases on which the injunctions regarding its prohibition apply? What are the alternatives that Islam offers for the economic well-being of man, and how would it resolve economic problems?
Meaning of Ribā
The Qur’an uses the word Ribā for interest/usury. The root meaning, in addition, growth, and increase. In Arabic, Rabwah means raised ground or a hillock. The word and its derivatives have been used in the Qur’an to mean increase, growth, and swelling, as well as interest. It is evident from various Qur’anic verses that any addition to the principal amount comes under the category of Ribā. However, it has banned only a particular kind of addition, which is why it is called al-Ribā. An increase in the principal amount caused by al-Ribā is different from an increase gained through business and trade (al-Bay’).
Ribā of the Days of Ignorance
In Pre-Islamic Arabia, various forms of al-Ribā were practiced. The most common practice was to give somebody a loan on the condition that he would pay a predetermined amount of interest for a certain period on a monthly basis, and on the expiry of that period would return the principal amount. If the debtor failed to repay the loan on the agreed date, he was offered a fresh deadline on an enhanced rate of monthly interest. It was this practice in all its various forms, that the Qur’an declared as unlawful and strictly forbidden.
Basic Differences between Ribā and Bay
Now let us examine the following: (i) What is the difference in principle between the normal way of trade and business (Bay’) and al-Ribā (interest-based transactions)? (ii) What are the basic features of al-Ribā that make it different from Bay’? (iii) Why has Islam prohibited al-Ribā while allowing Bay? In normal trade and business deals, the seller offers a certain commodity for sale at a price fixed by him that the buyer negotiates, forming a deal agreed by mutual consent. The seller adds to his capital an amount of his labor which entitles him to his profit. Ribā, on the other hand, is a deal with an additional sum that is determined beforehand for the grace period. This additional sum is Ribā or interest, which is not charged in return for any goods or services.
There are three constituent parts of Ribā.
- An addition to the principal sum
- Determination of this addition according to a fixed term
- The deal being conditional on the payment of an additional amount. A loan deal that consists of these three ingredients would be an interest-based transaction, irrespective of the nature of the loan.
The difference in principle between Bay’ and Ribā may be further elucidated.
- In Bay’, the profit is exchanged between the buyer and seller on an equal footing where both the buyer and seller benefits. Conversely, in an interest-based transaction the person receiving interest benefits, but the one who pays interest only gets a grace period. Interest-based deals are hence either made for the gain of one party and the loss of the other, or for the definite and pre-determined gains of one and the uncertain and undefined gains of the other.
- In trade, the matter ends once the buyer and seller have concluded a deal. In an interestbased transaction, however, the borrower has not only to return the principal sum but also the amount of interest accrued thereon.
- In an agricultural, industrial and commercial venture, the entrepreneur invests his labour, capital and time and reaps the harvest of dividends. In an interest-based venture, the lender invests his capital and becomes the controlling partner in the earnings of other stakeholders without putting in his own labour. He does not share in the loss and gain in proportion to his investment.
Rationale for Prohibition
In addition to the reasons above, there are other factors for the illegality of interest. On ethical grounds, it is a system that gives rise to selfish traits like capital worship and materialism. It prevents the free flow of capital and concentrates resources in the hands of the moneyed class, which eventually leads to a total collapse of the social structure. One also cannot deny the fact that an interest-based economy is in total disharmony with the way in which Islam wants to rebuild civilization, reorganize society economically and rejuvenate individuals morally.
Strict Nature of the Ban
In Islam, no crime has been dealt with in such harsh terms as usury and interest. The Prophet (Peace Be Upon Him) therefore tried his best to eliminate all forms of interest. During his farewell pilgrimage, he said, “He who takes interest, or offers interest, or writes deeds of interest-based deals, or stands witness to such deals, are all accursed by the Lord.” The purpose of these injunctions was to ban every form of interest and do away with the capitalist mindset, exploitative economic systems, and selfish behavior.
