Issues, Problems and Strategy: Riba

The Holy Quran explicitly and emphatically prohibits riba. There is complete unanimity among all schools of thought in Islam that the term riba stands for interest in all its types and forms. The phraseology of the verses in which people are instructed to shun interest and the severity of the admonition administered to those who do not abide by the divine injunction in this regard leave no doubt in one’s mind that the institution of riba is wholly repugnant to the spirit of Islam. The Holy Quran says:

“Those who swallow riba cannot rise up save as he ariseth whom the devil hath prostrated by (his) touch. That is because they say: Trade is just like riba: whereas Allah permitteth trading and forbiddeth riba. He unto whom an admonition from his Lord cometh, and (he) refraineth (in obedience thereto), he shall keep (the profits of) that which is past, and his affair henceforth is with Allah. As for him who returneth (to riba) such are rightful owners of the Fire. They will abide therein. Allah hath blighteth riba and made Sadaqat fruitful. Allah loveth not the impious and guilty.”

(II: 275-276)

The theme is continued in verses 278-279 of the same Surah:

“O ye who believe, observe your duty to Allah and give up what remaineth (due to you) from riba, if ye are (in truth) believers. And if ye do not, then be warned of war (against you) from Allah and His messenger. And if ye repent then ye have your principal. Wrong not, and ye shall not be wronged.”

The above-mentioned warning of “war from Allah and His messenger’’ clearly points that the institution of interest is something which runs counter to the Islamic vision of a just and exploitation-free economic and social order. The words that “Allah has blighteth riba and made Sadaqat fruitful” occurring in verse 276 of Surah Al-Baqarah bring out clearly the direction of the resource transfer that Islam encourages - it should be from the rich to the poor by way of Sadaqat and not the other way round through interest.

The rationale for prohibition of charging of interest on loans taken for consumption purposes is obvious. Such loans are usually taken by people of small means to meet urgent personal requirements as they have hardly any cushion of savings with which to meet such requirements. Prohibition of interest in so far as loans of this type are concerned rests mainly on humane considerations. The main rationale for prohibition of interest in the case of loans for production purposes stems from the concept of justice between man and man which is the cornerstone of the Islamic philosophy of social life. Uncertainty is inherent in a business enterprise irrespective of the time and space dimensions. The operating results of the enterprise cannot be foreseen and the occurrence of profit or loss and their magnitudes cannot be fully determined in advance. It is, therefore, a sheer injustice if the party providing money capital is guaranteed a fixed and pre-determined return while the party providing enterprise is made to bear the uncertainty all alone. On the other hand, a fixed interest rate can also be unjust to the lender of money in case the entrepreneur using this money earns a profit quite out of proportion to what he pays by way of interest.

The basis of co-operation between capital and enterprise which Islam cherishes is equitable sharing of the risks and gains between them. The following verse of the Holy Quran is quite explicit in this regard:

“O ye who believe! devour not your substance among yourselves unlawfully, but let it be a trading among you by mutual agreement.”

(IV: 29)

The above verse can be interpreted to mean that taking away of each other’s wealth, property or capital by unlawful means such as interest, gambling or fraud is prohibited while deriving benefit from each other’s wealth, property or capital under an equitable business deal struck by mutual consent is permitted.

The essential element of “trading” is that the return on capital employed depends upon actual operating results of the business undertaken. To apply this principle to modern modes of business and finance it will be necessary to completely reorganise the currently prevailing banking practices and to replace interest by a system of profit/ loss-sharing. Under a system of profit/loss-sharing, banks and other financial institutions will not get a fixed return on finance provided by them but will instead share in the profit/loss of the business enterprises to whom they provide the financial resources. Similarly, those who entrust their savings to banks and other financial institutions for a specified period will share in the profits/losses of banks. Replacement of the fixed interest system by a system of profit/loss-sharing would have far-reaching consequences and its successful functioning can greatly help in achieving greater social justice which is a cardinal objective of an Islamic society.

While the permissibility of the profit/loss-sharing (PLS) system under the Shari'ah and the undesirable concomitants of the interest- based system are beyond any doubt, serious reservations are often expressed about its successful applicability in our conditions for a number of reasons. The most important of these are as follows.

For profit/loss-sharing system to be instituted properly it is necessary that all business enterprises obtaining capital from banks and other financial institutions should maintain proper accounts and that this should be done honestly so as to reveal the true working results of the enterprises. The actual position, however, is that most of the enterprises either do not maintain accounts or do not maintain them properly or keep different sets of accounts for different purposes. Even the accounts of the firms in the corporate sector, which are audited by Chartered Accountants, often fail to reveal their true working results because of the wide-spread malpractice of deflating profits, inflating losses and showing fictitious losses. Some of the typical manipulations in this regard are as follows: (i) Over-valuation of opening inventory and under-valuation of closing inventory; (ii) Overvaluation of assets to inflate depreciation in order to reduce or eliminate the element of profit; (iii) Excessive remuneration charged by the Directors who are in most cases relatives of the entrepreneurs. The audit is of little avail in deciphering the true profit/loss position as the auditors are mostly concerned with the legality rather than the propriety and veracity of the expenditure shown.

At present these malpractices are resorted to mainly for evading taxes. The businessmen’s point of view is that they are forced to maintain different sets of accounts because of the wide-spread corruption in the tax-collecting machinery. Moral values being what they are, introduction of the profit/loss-sharing system in the financial dealings of banks and other financial institutions can aggravate such malpractices. The likelihood of collusion between the staff of banks/ financial institutions and the parties seeking finance can not be ruled out. Malpractices of this type are known to exist even under the present system. However, it is apprehended that in view of the greater scope for ill-gotten gains through this malpractice under the profit/loss- sharing system there may be a stronger temptation for such collusion.

Source: Money and Banking in Islam, Ziauddin Ahmed; Munawar Iqabal; M. Fahim Khan. Republished with permission.