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Commercial Interest and Usury

In the 17th century, two new technical terms of interest emerged after the establishment of banking system, namely:

  1. Tijarti Sood (Commercial Interest): Interest paid on loan taken for productive & profitable purposes.
  2. Sarfi Sood (Usury): Interest paid on loan taken for personal need and expenses.


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The present day banking system, which has given interest the moral and legal license, is the backbone of the prevalent capitalism.

When Muslim countries became subjugated to west in their economic field, some westernized Muslims in the 19th century, on one side, saw the increasing progress of the west in trade and industry and on the other side saw the shattering economic condition of fellow Muslims states. They also became conscious of the fact that banking is inevitable in the field of trade and industry not only on national level but also internationally. This prompted them to say that only usury is haram (illegal) but not commercial interest because rendering commercial interest haram would pose irresolvable problems to their way up to industrialization and economic progress. They only included usury in the term “Riba” as categorically prohibited in Qura’n and sunnah and freed commercial interest from it calling it totally different from the western concept of interest. Therefore, it was concluded that the prohibition of Riba was restricted to usury while commercial interest was perfectly Islamic.

There are two schools of thought on this issue. A detailed analysis of their arguments is discussed as under:

  1. First School: This school presents two arguments to support their point that only usury (not commercial interest) is prohibited in Islam:

Argument 1

“Riba as practiced during the days of the Prophet was only Usury”

Counter argument

This claim is groundless, since Islam when prohibiting something does not only prohibit one form of it that is prevalent, but all forms that might erupt in future. The changed state does not change the ruling for eg. Qura’n has prohibited the following:

  1. a) Liquor (Khamar): During the time of Prophet its form and the way of production was totally different from that of the present day liquor but the ruling remains unchanged even though the form has changed.
  2. b) Pork (Khinzeer): Irrespective how clean the present day breeding of pigs in high class farms may be, pork will stay prohibited and cannot be rendered halal (legal).
  3. c) Corruption/Immorality (Al Fahsha): Although a lot of sophisticated ways have been developed of this evil from the time of Qura’nic revelations prohibiting it, the ruling stands forever.

The same applies to interest and gambling. By claiming that it was in a different form during Prophet’s time does not change its ruling. It remains unchanged just as in case of Khamar, Khinzeer and Al Fahsha.

Argument 2

“Commercial interest did not exist in the days of Prophet”

Counter argument

This claim is also wrong. If one glances through the Islamic and pre Islamic history of Arabia, it will be evident that the interest type at that time was not restricted to usury but loans were granted for commercial and profitable purposes. To quote some examples:

  1. a) “The tribe of Umro bin Aamir used to take interest from the tribe of Mughairah. At the advent of Islam, Mughairah owed heavy interest to Umro bin Aamir.” In this narration, the transaction of interest between 2 tribes of Arabia have been pointed out who actually operated as trading companies; both tribes were very wealthy. Could it be that 2 wealthy tribes transacted interest just for personal need and expenses? The interest was simply commercial!
  1. b) History of the city of Ta’if tells us that it was only second to Makkah in trade (their main exports being liquor, raisins, currants, wheat, wood etc) and industry (major being leather and dyeing). The tribe of ‘Saqeef’’ (Jewish tribe) advanced cash on interest, not only to the natives of Ta’if, but the business community of Makkah as well eg. the tribe of Mughairah who were their permanent customer. This advancement, which was not only restricted to cash but also to commodities between wealthy tribes of Taif and Makkah who were usually traders and businessmen, was only for their commercial purposes and not for their consumption and personal needs. One of the ways of receiving interest was to double the principle amount plus interest in case of non payment of loan and this practice was applied to both cash as well as commodities. They had become accustomed to it.

At the time of signing the peace treaty with the people of Ta’if, the Prophet imposed conditions: i) Total elimination of interest based transactions. ii) Giving up of interest owed to and from them.

  1. c) The practice of making 2 trade trips, one to Yemen in winters and the other to Syria in summer was started by the tribe of Quraish of Makkah. These trips proved to be very profitable especially since being custodians of Kaa’ba, Quraish were looked at with respect, granted special concessions and protected in transit which was a necessity at that time. This way business & trade became their only means of livelihood. Investment became the order of the day in which women also took part and its circulation flourished and multiplied. With this background in mind, one can easily visualize that the city of Makkah more or less became the clearing house or the banking city and accustomed to their related amenities. It was only natural that interest was one of them. Since they advanced cash for commercial purposes and charged compound interest incase of default by the traders, and this earning of interest was their trade, they argued when Qura’n rendered interest haram (illegal) that the transaction of interest based loans is a type of trade in which the return on capital can be earned as in the case of rent received from assets. They could not differentiate between excess in shape of profit during a trade and excess in the shape of interest at the time of repayment of loan.
  1. d) Therefore in pre Islamic days, we see that Syedna Abbas bin Abdul Muttalib and Syedna Khalid bin Waleed formed a company with joint capital whose prime business was cash advancement on interest. Similarly Syedna Usman was one of the wealthy businessmen who lent money on interest. There were many other traders dealing full time in interest extending a network of interest based transactions.
  1. e) The way Syedna Zubair bin Awwam, who was famous for his trustworthiness, operated was quite similar to that of modern banking system. People used to deposit with him their capital as Amanah (trust or security). However, Syedna Zubair used to make it clear to the depositors that he would accept the deposits as a ‘loan’ and not as ‘security’ (Amanah). Because he knew that he will not be fully liable according to Shariah in case these Amanahs got destroyed but in case of having them as a loan, he will be fully liable to pay them back. He was afraid that in case of losing any deposited amount, his image as the trustworthy caretaker would be damaged. He therefore used the term ‘loan’ for such deposits to ensure guaranteed payment so that he enjoys everyone’s confidence in him. Another reason for using the word ‘loan’ was to legalize trading and earning profits on such deposits. Because if he got those deposits as Amanah, he could not utilize it for his business, as it is not permissible in Shariah to use Amanah. This clearly shows that borrowing in those days was not only for consumption purposes but for commercial purposes as well. Syedna Zubair left a will with his son Syedna Abdullah bin Zubair before he died to sell his property to repay the loan, if required. The total amount calculated after his death for repayment by his son was 22 lacs. It is obvious that a rich Sahaba such as Syedna Zubair did not owe this loan of 22 lacs out of any need; rather it was an investment of securities that was circulating in trade.

Another Clear Argument

Syedna Abu Hurairah narrated that the Prophet said, “He who does not abandon Mokhabara, will be caught in a war against Allah & His Prophet.” In this narration Prophet has rendered Mokhabara illegal just like riba and has declared a war against those who indulge in it just like riba.

What is Mokhabara?

It’s actually a division of the crop by agreement between the landlord and cultivator in which the landlord gives his land to cultivator for cultivation purposes in order to get his preagreed amounts of the crop irrespective whether the production is low or high. For eg. “A” lends his land to ‘B’ for cultivation on the condition that he will get a predetermined portion on each crop eg. 5 mounds. Such a transaction is called Mokhabara.

Prophet had called Mokhabara a form of riba. Now one should think over whether he referred to usury as the form of riba or he referred to commercial interest. It is similar to commercial interest as both Mokhabara and commercial interest are used for productive businesses. Whereas in the case of usury, the borrower uses the loan for personal use and not productive purposes

To sum up, Prophet included Mokhabara in riba that has no similarity with usury, rather with commercial interest. The fact that during Prophet’s time, the dealing in commercial interest was common is proven and also that this form is prohibited.

  1. Second School:

This group present two arguments justifying their point of view that are mentioned below:

Argument 1

The factor leading to prohibition of Riba (Interest) is that if a borrower faces a loss, he still has to pay an excess amount over the principal, which is basically an exploitation of his need whereas the lender on the other hand gets an increase on his surplus capital without any effort which is unjust. But this factor is not found in commercial interest since both the borrower as well as the lender gets profit; the borrower on the amount he has circulated in business and the lender in shape of interest over his principle amount. Therefore, no one faces unfairness or injustice in this transaction.

Counter argument

This argument is quite appealing and attractive at the face value, as it is based on the assumption that no one suffers in case of commercial interest. But after analysis, it is proven that Quran has not only prohibited that one party faces a loss and the other gets profit but has also prohibited one party getting confirmed profit and the other party unconfirmed profit from the same investment as we have studied above in the case of Mokhabara.

Argument 2

This argument is based on the Qura’nic verse “O believers do not devour one another’s possession wrongfully; rather than that, let there be trading by mutual consent” (Al Nisa verse 29). In the above verse, Qura’n has prohibited “Wrongful devouring” which will only arise if the consent of one of the parties is absent and naturally the party who is devouring consents, the other party never consents; he only gives in since he has no other option. So we come to the conclusion that if the consent and satisfaction of both parties is present in a deal, it cannot be called “Wrongful devouring”. According to this logic, commercial interest is permissible since the mutual consent is present of both parties whereas riba is prohibited only when one party is getting the excess out of his selfishness and the other party is encountering the loss, as he has no other alternative.

Counter argument:

This argument is of superficial nature. Mutual consent is not the criteria to render anything prohibited or not in Islam. Would the act of adultery be allowed if the condition of mutual consent is fulfilled? Similarly, there are many transactions in business, which are rendered illegal even with mutual consent. For reference see “Abwab ul Buyu al Batila” where Muhaqila and Talqi al Jalab being forms of Bai where the mutual consent and satisfaction is present and is prohibited by Prophet . Similarly, mutual consent is present in commercial interest and gambling too but in spite of that, it has been prohibited. Therefore no such criteria exist in the legality of any transaction that both parties approve; rather the approval should be on the transaction, which has not been prohibited by Shariah. To quote the words of Qura’n “Except the legitimate business…….”

Source: Dr. Muhammad Imran Ashraf Usmani, Meezan Bank’s Guide to Islamic Banking.