Issues Relating to the Prohibition of Riba

Believers,

fear God and waive what remains due to you on account of Riba (Al-Baqarah

2: 278)

The Qur’an emphatically and

unequivocally prohibits Muslims from taking Riba.

The prohibition of Riba, in view

of the related directives of the Qur’an, has remained undisputed throughout

Muslim history. However, after the general practical dominance of the

capitalistic approach in the world economy, a number of questions, which

previously did not have much significance, have not only become pertinent but

also need precise answers in the successful designing of any economic model

based on the directives of Islam.

In this brief article, we shall

consider some of the important questions that are generally raised in this

respect. The questions that shall be considered are:

• What is Riba? What is the

  criterion on which we can term a particular transaction to be based on the

  concept of Riba and thus

  prohibited?

• Does the prohibition of Riba

  apply only to transactions based on compounded interest or does it also

  include transactions based on simple interest?

• Does the prohibition of Riba

  apply to interest charged on commercial loans as well or is it restricted to

  interest charged on personal, non-business loans only?

• Why is Riba prohibited by

  the Qur’an?

• Does the prohibition of Riba

  also hinder any inflationary adjustments in loans?

• Does the prohibition of Riba

  also affect the concept of rent, as there apparently seems to be no

  significant difference in Riba

  and rent? Is there any difference between Riba

  and rent?

• Does Islam allow a ‘buy back on mark-up’ arrangement?
• Is payment of Riba also prohibited in the Islamic Shari`ah?
• In case of the abolition of Riba

  from a Muslim economy, will the Muslims be liable to honor their past

  financial commitments, which may be based on Riba?

In the following sections, each of

these issues shall be considered briefly.

The Implication of the Word

‘Riba’

The first and probably the most

significant question that is raised in this connection relates to the meaning

and the implication of the word Riba.

Incidentally, some time back, when the Supreme Court of Pakistan asked for

assistance from Muslim scholars and thinkers in taking a decision about the

prohibition or allowance of contemporary commercial interest, it also asked the

same question. The question asked by the honorable court was worded as follows:

The Holy Qur’an has prohibited Riba.

What is meant by this term? What is its true definition and connotation in the

light of the Holy Qur’an and Sunnah

of the Prophet (PBUH)?

It should be clarified at the outset

that the word Riba is not a term

specific to the Qur’an. On the contrary, the word has been used in the Qur’an in

its simple literal meaning. This is a very important fact and has its

implications in determining the meaning of the word Riba.

Had the word been used as a term in

the Qur’an, it would have been necessary that the meaning be determined on the

basis only of its usage in the Qur’an. On the other hand, if Riba

is a common Arabic word, and is used in the Qur’an in its common literal meaning

and connotation, then the determination process would not depend solely on the

Qur’an but it would then actually follow the same course as we adopt in

determining the meaning and connotation of any given word of any given language.

Thus, we shall have to base our findings primarily on the authentic dictionaries

and other such reliable sources of the Arabic language.

The Arabic verb: Raba, Yarbu has

generally been explained in most of the Arabic dictionaries as:

to increase and to

grow [to augment].

The noun, Riba

or Al-Riba, generally used in the

Qur’an, has been defined by the most authentic and well known Arabic dictionary “Aqrab

al-Mawarid” as:

[It is the same thing

as the transaction of] al-`eenah

… and increase

It is quite clear from the above

statement that as a noun, the word Riba

or Al-Riba is used in two

meanings: 1- increase and 2- something called “al-eenah“.

“Aqrab al-Mawarid” itself under

the word

has defined

or the ‘Transaction of al-`eenah‘

as:

That a man asks another for a

loan, but the lender is not interested in extending that loan as he shall not

be able to get any extra amount on that loan [because that is prohibited]. So

he says: I sell you this cloth for twelve dirhams [on credit] for a

fixed period of time. While it’s actual price was ten dirhams. Thus he

gains two dirhams for that fixed period of time.

The meaning and connotation of the

word “Riba” or “Al-Riba”

have remained unchanged over time. The meaning of this word as given in some

modern-day Arabic dictionaries is as follows:

According to “Al-Raayed“:

Riba

means: 1- the extra [i.e. the additional amount] or the increase; 2- gain on a

loan.

According to “Laroos“:

Riba

means: a) the extra [i.e. the additional amount]: the gain or the profit that

a gainer gets on his loaned amount; b) (in financial and economic language)

the amount that a borrower pays over and above the amount that he had borrowed

following specified conditions [regarding rate and time].

The same kind of explanation has

also been given in “Mo`jam al-Waseet“.

In the light of the above

explanation, we can say that the word “Riba”

is used in the Arabic language in two connotations: 1) any increase on an

amount; and 2) a gain on a loan (or investment), at a predetermined rate, which

the lender (or investor) receives from the borrower (or the business in which he

invests) for allowing the borrower to use his financial assets for a time period

(on the basis of the meaning given in “Aqrab

al-Mawarid“, “Laroos”

and “Mo`jam al-Waseet“).

Now, the obvious question that comes

to mind is: In which of the two meanings has the Qur’an used the word “Riba“.

A close look at the verses in which the word “Riba”

has been used by the Qur’an provides us with adequate basis to say that it is

actually in the second of the two meanings given above that the Qur’an has used

this word. Some of the reasons that clearly guide us in this matter are:

• Had the Qur’an used the word Riba

  in the first meaning, it would also have applied to that “increase” which is

  a result of all kinds of trading and business activities. But it is obvious

  from the words of the Qur’an that such “increase” has not been included in

  the implications of the word “Riba“,

  as is evidenced from the words: “They say: Trading is but like Riba”

  (Al-Baqarah 2: 275) and: “Allah

  has allowed trading and has forbidden Riba”

  (Al-Baqarah 2: 275). In both

  these sentences, it is clear that the “increase” which is the result of a

  trading or a business activity is not included in the word “Riba“.

• Then again the Qur’an says: “… then you shall get your principal amounts

  back. Neither should you wrong nor should you be wronged.” (Al-Baqarah

  2: 279). This verse removes all doubts that might have existed in one’s mind

  regarding the fact that the Riba

  referred to in these verses is what has been given above in the second

  meaning.

• Then again, the Qur’an says: “If he [that is the debtor] is in some

  difficulty [and is therefore not in a position to return the principal

  amount immediately] grant him time till it becomes easier for him [to return

  the principal amount]” (Al-Baqarah

  2: 280).

It should be quite clear from the

details given above that the word “Riba”

is used in the Qur’an in the same meaning in which we generally use the word “interest”

(as in ‘interest on loans’) in the English language and the word “sood“,

in the Urdu language. Thus, the word “Riba”

is actually used for: “a gain on a loan or an investment, at a predetermined

rate, which the lender demands from the borrower for allowing the borrower to

use his financial assets for a given period of time”.

Does the Qur’an only Prohibit

Compounded Interest?

One of the questions regarding the

prohibition of Riba, as directed

by the Qur’an, is whether the prohibition mentioned in the Qur’an is for all

kinds of Riba (whether simple or

compounded) or does it pertain only to compounded Riba. This question has generally been asked because of an

opinion expressed by some Muslims, who hold that the Qur’an has only prohibited

compounded Riba. Although the

majority of the Muslim scholars do not hold this opinion to be correct, however,

because the opinion is presented on the basis of the Qur’an, it, therefore,

deserves our attention.

The mentioned opinion is presented

on the basis of Aal Imraan 3: 130.

The verse reads as:

Believers do not

devour Riba, increasing it

manifolds.

It is held, on the basis of this

verse, that the Qur’an has admonished the believers against taking Riba

only when it is ‘increased manifolds’ – in other words, when it is compounded.

The Qur’an, however, does not

support this opinion. The Qur’an, in more than one verse, has prohibited taking Riba,

without the qualification of ‘increasing it manifolds’, or compounding. For

instance, in Al-Baqarah 2: 275,

the Qur’an says:

Those who devour Riba

shall rise up before God like men whom Satan has demented by his touch.

Then again, in the same verse, the

Qur’an, while referring to an objection raised by the disbelievers says:

And God has allowed

trading but prohibited Riba.

In Al-Baqarah

2: 278, the Qur’an says:

Believers, fear God

and waive what remains due to you on account of Riba.

Then, once again in Al-Room

30: 39, the Qur’an says:

And whatever you give of Riba

[based loans] so that it increases [by circulating] in other people’s wealth,

it does not increase in the sight of Allah.

It is quite apparent that the

prohibition mentioned or referred to in the cited verses is absolute and not

qualified with ‘increasing it manifolds’ or, as interpreted by some Muslim

scholars as compounded.

It should be interesting to note

that the opinion that Aal Imraan

3: 130 prohibits only compounded Riba,

is based on an incorrect understanding of the referred verse. The verse has been

interpreted to imply that a Muslim must not take Riba,

if it is ‘increased manifolds’, while there is no harm in taking Riba,

if it is not increased manifolds. In my opinion, this is not the correct

interpretation of the verse. What the verse truly implies – keeping in view the

other cited verses, which mention the absolute prohibition of Riba,

whether compounded or at a simple rate – is that ‘Muslims have been directed to

refrain from taking Riba, the

right thing for them, therefore, is to avoid taking even a penny on account of Riba,

rather than devour it increasing it manifolds’. The verse, in its magnificent

literary style, implicitly stresses on the abhorrence and detestability of the

Shylock mentality. In such a style, ‘increasing it manifolds’ is not a condition

under which ‘Riba’

is prohibited, but is only to magnify the detestability of the act. This

literary style of Aal Imraan 3:

130 is the same as is used in Al-Baqarah

2: 41. The Qur’an says:

Do not trade my

revelations at a paltry price…

In this verse, the Qur’an has

admonished the Banu Israel against

ignoring God’s revelations for worldly gains. The implication of this verse,

obviously, is that no worldly gain is great enough to qualify as the right price

for turning one’s back on God’s revelations. The verse should, clearly, not be

taken to imply that one may ignore God’s revelations only when one is offered a

higher price to do so. This literary style is one in which the abhorrence and

detestability of an impious act is highlighted. Similarly, in Aal

Imraan 3: 130 the implication is not to allow Riba

when charged at a simple rate but to highlight the abhorrence and detestability

of the usurer’s mentality.

Another closely related question

that is sometimes posed about the prohibition of Riba

is that whether the charged rate has any effect on the prohibition or otherwise

of Riba. This question, like the

previous one, is also based on the contention that in Aal

Imraan 3: 130, the Qur’an has prohibited Riba,

when it is increased manifolds. Thus, according to this understanding, when Riba

is charged at a nominal or a competitive rate, it is not prohibited in Islam.

Nevertheless, keeping the above

explanation of Aal Imraan 3: 130

and also the other cited verses in which the Qur’an has mentioned the absolute

prohibition of Riba, in

perspective, we may safely derive that Riba,

whether charged at a simple rate or at a compound rate or whether charged at an

exorbitant rate or at a nominal or competitive rate, is prohibited by the Qur’an.

Does the Prohibition of Riba

Apply Only to Consumption Loans?

The third question with respect to

the prohibition of Riba is that

whether the Qur’an has prohibited to charge Riba

on loans taken for consumption purposes only or does the prohibition also apply

to Riba charged on commercial or

business loans as well.

This question is the based on the

contention of some Muslim scholars, who hold that during the times of the

revelation of the Qur’an, there was no concept of commercial loans. Loans were

generally taken for meeting personal consumption – non-business and

non-commercial – requirements. Thus, when the Qur’an prohibited Riba,

this prohibition could only have been with reference to the Riba

that was being charged in the immediate environment of the revelation of the Qur’an.

Hence, the prohibition of Riba,

mentioned in the Qur’an refer only to Riba

charged on consumption non-productive loans. If a loan is taken for commercial

or productive purposes, there is no element of exploitation in asking for an

increment on such a loan and, therefore, such an increment should not be

considered Riba.

The first thing that should be

clarified is that to include or exclude a given transaction from the scope of Riba

is not within our jurisdiction. All that we have to ascertain is the

implication, meaning and connotation of the word Riba

in the Arabic language. Once the implication and the meaning has been

satisfactorily ascertained, we shall then have to apply the Qur’anic prohibition

to all such transactions which come within the scope of the implication, meaning

and connotation of the word Riba.

Thus, it is the responsibility of those scholars who hold that the prohibition

of Riba applies only to increments

charged on consumption loans to provide linguistic basis to prove that the word Riba,

in the Arabic language, was used for increments on loans taken for consumption

purposes only. We have, on the contrary, established in one of the previous

sections that Riba, in the

classical Arabic language, was used for any increment on a loan (or an

investment) at a pre-determined rate. The purpose for which the loan was taken –

on which this increment was charged – does not effect the implication of the

word “Riba“. In other words, Riba,

as we have seen, is any increment on a loan (or an investment) at a

pre-determined rate, irrespective of whether the loan is taken for consumption

purposes or for commercial purposes.

Moreover, the contention that during

the times of the revelation of the Qur’an loans were granted or taken for

consumption – non-business – uses only, is not supported by the Qur’an. The Qur’an,

in Al-Room 39: 30 has referred to

the motives of the people who used to give loans on Riba

in such words that clearly point-out the fact that people, during the times of

the revelation of the Qur’an, used to give loans for commercial – productive –

uses as well. The Qur’an says:

And whatever you give of Riba

[based loans] so that it increases [by circulating] in other people’s wealth,

it does not increase in the sight of Allah.

The words “so

that it increases in other people’s wealth” could not be said about

loans granted to poor people for consumption purposes. It is obvious from the

referred words that in the Arab society, in which the Qur’an was revealed, loans

were generally granted and taken for commercial and business usage and not for

personal non-commercial usage only.

Why does the Qur’an Prohibit

Riba?

An analysis of the positioning of

the directives related to the prohibition of Riba

in the Qur’an shows that it has primarily mentioned the prohibition of Riba

in the particular context of promoting and stimulating the Muslims on Infaaq

fi Sabeel Allah – i.e.

charity, helping others and spending in the cause of Islam^[1].

For instance, in Surah Al-Baqarah,

the Qur’an has directed the Muslims to spend for the needs of others as well as

for the cause of Islam (261 – 274). After this directive, the Qur’an has

mentioned those who in their greed of earning Riba

hold back from spending their money for the general good of the society and that

of Allah’s Deen^[2]

(275 – 281). The contrast of the spirit inculcated by Riba

with that which is required for succeeding in the life hereafter has been

specifically made in verse 276, where the Qur’an says:

God obliterates usury and

increases charity [in blessing]. Indeed God does not like the ungrateful

usurpers.

The same contrast has also been made

in Aal Imraan 3: 130 – 134

(especially with reference to the needs of Allah’s deen,

with particular reference to those who held back from spending in Allah’s way at

the time of the battle of Uhud)

and Al-Room 30: 38 – 39

(especially with reference to the needs of a person’s relatives and the

destitute). The Qur’an, in Al-Room

30: 39, says:

And whatever you give of Riba

[based loans] so that it increases [by circulating] in other people’s wealth,

it does not increase in the sight of Allah. While whatever you spend in

charity, seeking the pleasure of God – these are the ones for whom it shall

truly be increased.

Thus, from the positioning of the

directive regarding the prohibition of Riba,

it may easily be derived that the Qur’an has mentioned it as a deterrent against

the spirit of Infaaq fi Sabeel Allah.

Riba, it may be derived from the

above explanation, is considered by the Qur’an to develop apathy toward the

needs of other individuals, the society in general, and Allah’s deen.

In other words, according to the Qur’an, Riba

has the potential of inculcating in a person the spirit of indifference towards

the needs of others. This indifference has extremely adverse effects on the

individual as well as the collective morality of a people. It replaces the

spirit of mutual help with commercialism and that of sacrifice with apathy and

self-interest.

Furthermore, the Qur’an has also

mentioned that taking Riba is Zulm

– i.e. injustice^[3].

There is absolutely no justification, in the eyes of the Qur’an, in asking for a

pre-determined increment on a

loan, when the loan itself is to be returned in full.

The aspect of Zulm, in charging Riba,

is generally not greatly contested in cases where a loan is taken for a

personal, non-commercial usage. However, for some people it is difficult to

comprehend any element of Zulm in

charging Riba on a loan taken for

a business or a commercial usage. Although, for a Muslim, it should suffice that

because the Qur’an has unequivocally declared that taking Riba

is unjust, therefore, it should be considered and categorized as such. Yet, for

the satisfaction of the questioning mind, it seems reasonable to point out the

major element of injustice in charging Riba,

even in cases where a loan is taken for a business venture.

Riba,

it should be kept in mind, is a pre-determined increase on a loan (or an

investment). It is primarily the element of pre-determination of the increase

that makes it Riba – and as a

result prohibited in Islam. It is the same element of pre-determination of the

increase that makes it a Zulm or

an injustice. A loan is generally granted to a venture (whether commercial or

non-commercial) for two reasons. Firstly, a loan may be advanced with the spirit

of supporting a particular venture. This, generally, is a philanthropic

activity, where a person lends an amount of money for the purpose of supporting

another person or a group and is only interested in getting his money back at

the stipulated time. Secondly, a loan may be advanced with the spirit of

investment. In this case, the prime interest of the lender is to earn a return

by advancing his idle wealth. It is primarily in these types of loans that the

element of Riba is considered to

be morally justified. The moral justification generally propounded for charging Riba

in such loans is that if the borrower is deriving a monetary advantage from

capital, which is provided by someone else, it would only be fair if the real

owner of the capital is also given a reasonable share in the monetary advantage

thus derived. Makes sense!!! However, it should be understood that the

pre-determination or the pre-fixation of the ‘reasonable share’ that the owner

of the capital should get is what makes the whole idea, in the eyes of the Qur’an,

to be against the principle of justice and equity. It is indeed justified that

the real owner of the utilized capital be given a ‘reasonable share’ in what his

capital has produced. Nevertheless, why should such a ‘reasonable share’ be

determined before any production has materialized or even initiated? Why should

not the ‘reasonable share’ be apportioned on the basis of the actual production

that the capital has succeeded in producing? If the utilized capital has only

succeeded in producing far less than the initial expectations (or has not

succeeded in producing anything at all), then why should capital be apportioned

a bigger share than it deserves (or any share at all)? On the other hand, if the

utilized capital has succeeded in producing more than the expectations, then why

should the owner of the capital be deprived of his ‘reasonable share’? In my

opinion, it is primarily these aspects of the Riba-based transactions that the Qur’an holds to be against

the principle of justice and equity and is therefore emphatic about the

prohibition of any pre-determined increase (Riba)

on a loan – even if the loan is taken for a commercial purpose.

To summarize, the reasons for the

prohibition of Riba,

as derived from the Qur’an are:

It adversely affects the spirit of

charity, sacrifice for a higher cause and mutual help, which has its serious

repercussions on the individual and collective morality of man and thus on his

success in the life hereafter.

According to the Qur’an, charging Riba

is against the principle of justice.

Does the prohibition of Riba

hinder Real Value adjustments in loans?

With the advent of paper money and

the repercussions of the management of paper money, another important question

that is commonly asked is whether any inflationary adjustment in loans would be

allowable under the Islamic law or would it also be included in the ambit of the

prohibited Riba.

The question raised in this

connection, may be stated as:

If a debtor who had borrowed a

particular amount of paper currency repays the same amount to his creditor after

a substantial time, during periods of inflation, the creditor can suffer a

significant loss in real-value terms, even though the nominal value of the loan

would be returned in full. Thus, under the circumstances, would Islam consider

it unjustified on the part of the creditor to demand from the debtor to pay a

higher nominal value than the amount originally advanced, as a compensation for

the loss of the real-value, due to inflation?

Keeping in perspective the

implication of the word Riba, as

explained in the first section, we may safely say that any inflationary

adjustment, in which the rate of such adjustment is not arbitrarily

pre-determined, but is based on the actual rate of inflation cannot be brought

under the ambit of Riba, because

of the simple reason that such an inflationary adjustment is not an increase on

a loan at a pre-determined rate.

It may be added here that such

inflationary adjustments are not only allowed but also seem to be quite

desirable. Just like charging Riba

is an injustice because it asks for an arbitrary increase in the amount loaned

to the borrower, avoiding value adjustments in times of inflation or, in other

words, avoiding to pay back the full value of the loaned amount is also an

injustice, because it asks the lender to accept a lower value, in settlement of

the value that he had originally loaned to the borrower. Obviously, If Islam

prohibits Riba due to the element

of injustice, an Islamic state, on the same principle, should make it mandatory

for all borrowers and lenders to make real value adjustments in the settlement

of all deferred payments.

However, the following points must

be kept in mind in such real value adjustments in the settlement of deferred

payments:

• To avoid any potential disputes in future, the criteria for such value

  adjustments should be mutually agreed upon and decided at the time of the

  loan transaction.

• Any equitable method for such value adjustments may be adopted. For

  example, some of the bases of such adjustments may be:

1. the rate of inflation declared by the state; or
2. the average price index of a particular number of the most consumed

   items in the country; or

3. the price of gold in the country, etc.

• Whatever methods are adopted for such real value adjustments in the

  settlement of deferred transactions, it should be kept in mind that they

  should not be adopted as methods of inflationary adjustments only, but that

  of value adjustments. This implies that the adopted method should not work

  to the advantage of any of the parties concerned. In case there is a fall in

  the value of paper currency (as is the case in times of inflation), the

  method should provide a proportionate increase in the nominal amount of the

  repayment. On the other hand, if there is a rise in the value of paper

  currency (as is the case in times of deflation), the method should provide a

  decrease in the nominal amount of the repayment. For example, suppose at the

  time of the loan transaction, the lender and the borrower mutually agree on

  relating the loan with the prevalent market price of gold and also agree on

  retiring the loan by relating the loan with the prevalent market price of

  gold at the time of retirement. Suppose A lends Rs. 100/- to B. The market

  price of gold at the time of the transaction is Rs. 100/- per gram. Thus, it

  may be agreed that A has lent one gram of gold to B. If the market price of

  one gram of gold at the time of the retirement of the loan, say after five

  years, is Rs. 150/-, B shall have to pay Rs. 150/- to fulfill his

  obligation. By the same token, if the market price of gold falls to Rs. 90/-

  at the time of retirement of the loan, B shall then be considered to have

  cleared his obligation by paying Rs. 90/- to A.

What is the Difference between

Riba and Rent?

Another interesting

question/objection that is raised regarding the prohibition of Riba

is that its prohibition, when seen in comparison to the allowance of rent, under

the provisions of Islamic law, does not seem to make sense. Riba

apparently does not seem to be any different from rent. Thus, prohibition of Riba

should also prohibit the institution of charging rent. After all, what is the

difference between lending money (on which charging Riba is not allowed) and lending property (on which rent is

charged, which is seen as allowable under the Islamic law).

The question, thus, is whether there

is any empirical difference between the two charges of Riba and rent or not.

To understand the difference between

the two concepts of Riba and rent,

we shall first try to understand the simple mechanism in the working of the two

concepts.

Let us first take rent.

Rent

is a payment made for the use of an asset or a service (which may

include payment made for the use of land, premises, a telephone equipment,

machinery etc.). Rental payments continue till the time that the tenant uses the

asset or the service and are understood to cease at the end of such usage. The

end of a rental contract, is marked by:

• Discontinuity, on the part of the tenant, of using the asset or service;
• Transfer of the possession of the existing (i.e. used) asset from the

  tenant to the owner; and

• Discontinuity of the rental payments from the tenant to the owner.

It should be noted that rental

payments are not payments for the purchase of an asset, but on the contrary, are

payments for the purchase of the service provided by the asset. The asset

remains under the ownership of its original owner. At the end of the rental

agreement, the tenant is not required to replace the existing asset with a new

one and return it to the owner, but is only required to return the existing

asset to its owner. Rent,

thus, is a charge on the use of an asset or a service.

Riba,

on the other hand is a time-based charge on the sale of an asset.

In other words, Riba is a

pre-determined additional payment demanded by the seller (of the asset) from the

buyer, in return for allowing a stipulated time to make the payment for the

transacted sale. The asset being sold may be a real asset or a financial asset

(i.e. it may be a house, a piece of cloth, gold, or paper currency etc.).

A Riba-based

loan or financing agreement, in effect, is a sale of a financial asset (money)

or a real asset (like land) in which the seller allows time to the purchaser to

make the payment for the transacted sale. It should be interesting to note that

the sale of financial assets – like money – can only take place in the shape of

credit sales. No one, in his senses is likely to buy Rs. 100/- for an immediate

payment of Rs. 110/- and vice versa.

Furthermore, buying Rs. 100/- for an immediate payment of exactly Rs. 100/- is

an equally meaningless transaction. However, many people would be and are

willing to buy Rs. 100/- today for a reasonably delayed payment of Rs. 200/-.

Thus, in a Riba-based loan

agreement, the seller offers to sell his financial asset (money) for the

immediate sale price of the financial asset (i.e. the face value of money) plus

an additional sum of money charged (at a pre-determined rate) for the time

allowed to make the payment of the sale transaction. On the other hand, in a Riba-based

real asset’s financing agreement, the seller offers to sell his real asset (for

instance land) for the immediate sale price of the real asset plus an additional

sum of money charged (at a pre-determined rate) for the time allowed to make the

payment of the sale transaction. In a Riba-based

loan or financing transaction, therefore, the original (full) value of the asset

(financial or real) sold, as well as an additional sum (Riba)

is to be paid to the seller.

Keeping the above explanation in

perspective, the main points of distinction between Riba

and rent may be enumerated as follows:

• Nature of Charge: Rent is a charge on the use of an asset. The tenant

  is required to pay the usage charge, for as long as he wants to use the

  asset. Riba, on the other hand, is a time based charge (at a pre-determined rate) on the sale

  of an asset (real or financial) that a seller demands from the buyer for

  allowing the buyer a stipulated time for making the payment of the

  purchase of the asset in question.

• Period of Contract: A rental agreement may be called off at any such

  time when the rented asset loses its utility in the eyes of the tenant

  or is required back by the owner of the asset. At the end of the rental

  agreement, the tenant is only required to deliver the possession of the

  existing asset to the owner. In contrast, a Riba-based

  loan or financing agreement cannot be called off without the payment of

  the full (original) value of the asset sold in addition to the

  accumulated (pre-determined) charge (Riba),

  even if the borrower (purchaser) loses all utility or usage of the asset

  lent (or sold).

• Nature of Return to the Owner or Lender: At the end of a rental

  agreement, the tenant is required to return the rented asset to its

  owner, in its existing (used) state. The tenant is not required to

  return the original (full) value of the rented asset, as it stood at the

  time of the rental agreement. In

  contrast to the rental agreement, in a Riba-based

  loan or financing agreement, the original (full) value of the asset lent

  (or sold) is to be returned to the lender (or the seller). Thus, in a Riba-based

  loan or financing agreement a charge (at a pre-determined rate) is to be

  paid to the seller, in addition to the return of 100% of the lent value.

• Ownership Risk: In case of a rental agreement, all ownership risks are

  retained by the owner of the rented asset. Thus, if, for instance, the

  rented house is struck by lightening or is completely destroyed in an

  earth quake, the total loss is borne by the owner of the house. In case of a loan agreement – which, for all practical

  purposes, is a sale agreement with the provision of deferred payment to

  the seller – all ownership risks are transferred to the borrower

  (buyer), while the ownership rights are retained by the lender. Thus, in

  case the loaned asset is completely destroyed in a contingency, the loss

  is fully borne by the debtor, while the creditor’s original value – as

  well as any additional amount due to him on account of Riba

  – remains fully secured. In fact, the creditor (or the

  lender) faces the risk of losing his original value – and the

  accumulated amount of Riba –

  only if the debtor is declared to be insolvent.

Keeping these points of distinction

in mind, it should be clear that a rental agreement is quite distinct from a Riba-based

loan or financing agreement. A Rental agreement can only be comparable to a Riba-based

loan or financing agreement if:

• It requires the tenant to pay the periodic rent;
• It is irrevocable till the full value of the rented asset, in addition to

  any predetermined service charges, is received;

• It requires the tenant to return the original value of the rented asset at

  the end of the rental agreement. This implies that at the end of the rental

  agreement, the tenant be required to return the rented asset, not in its

  existing state, but in its original state, as it was at the time the rental

  agreement was contracted; and

• During the time of the rental agreement, all ownership risks are

  transferred to the tenant, while the ownership rights are retained by the

  owner.

In the absence of these clauses, it

is obvious that a rental agreement is distinctly separate from a Riba-based

loan or financing agreement^[4].

Is ‘Buy-back on Mark-up’

Arrangement Lawful?

As the gravity and the significance

of the prohibition of Riba in

Islam was felt by the Government of Pakistan, efforts were directed toward

designing an economic structure which was free from Riba.

In this connection, a number of alternative were suggested and proposed for the

purpose of the mobilization and distribution of financial resources, which,

previously, were controlled through the mechanism of interest – considered and

interpreted to be Riba by the

managers of the Pakistani society. One such proposal was the “buy back on

mark-up” arrangement.

Under the “buy back on mark-up”

arrangement, a financial institution finances its client on the basis of an

agreement, whereby the client proposes to sell a particular commodity to the

bank and simultaneously buys it back at a higher price on the basis of deferred

payment. A certain rate of mark-up (generally stated as ‘percent per annum’) is

applied to the second sale. Thus, through this arrangement, the bank finances

the requirement of the client and gets its investment back from the client over

a stipulated period of time, with an increase.

It is generally asked whether such

an arrangement includes the element of Riba

or not.

In the light of the explanation of

the word Riba in the first

section, it should not be difficult to determine whether such an arrangement

includes any element of Riba or

not. The simple question to answer is whether or not such an arrangement of

financing includes an element of pre-determined increase on a loan (or an

investment). If the answer is ‘no’, then the arrangement is clear of Riba

and should, therefore, be considered as allowed in Islam. However, if the answer

is ‘yes’, then the arrangement is adulterated with the element of Riba

and should, therefore, be considered as prohibited.

A close look at the transaction

shall show that the referred arrangement is primarily a sale on credit

arrangement – as are all installment purchase arrangements. It may be noted that

a sale on credit arrangement, in its essence is no different from a simple loan

arrangement. The only difference is that in place of a financial asset, a real

asset – like machinery, land, building etc. – is sold out on credit (loaned or

invested), while in a simple loan arrangement, as we saw in the previous

section, a financial asset is sold out on credit. Moreover, there is also the

element of increase at a pre-determined rate that the ‘lender’ (or the seller)

shall get from the ‘borrower’ (or the buyer). Thus, the “buy back on mark-up”

arrangement entails:

• A credit sale, which, in essence is no different from a loan; and
• An increase on this loan at a pre-determined rate.

These, precisely, are the two

factors, which need to be present in a transaction to qualify to be termed as a Riba-based

transaction. We can, therefore, safely say that a “buy back on mark-up”

arrangement, due to the presence of the element of Riba

in it, cannot be considered as allowable in Islam.

Does Islam Prohibit Payment of

Riba?

The Qur’an has mentioned the

prohibition only of taking Riba.

However, in some of the narratives ascribed to the Prophet (pbuh) – i.e. Hadith

– the Prophet (pbuh) is reported to have condemned and prohibited the payment of

Riba. Furthermore, the Prophet (pbuh)

is also reported to have condemned offering one’s services as a scribe for a Riba-based

loan deed and/or standing witness on such a loan deed. In view of this,

apparent, discrepancy it is sometimes asked whether Islam prohibits only the

taking of Riba or does this

prohibition also include payment of Riba.

It is clear from various verses of

the Qur’an that the real prohibition of the Shari`ah

applies to taking Riba. The Qur’an

has not even once mentioned the prohibition of giving Riba.

The reason is quite simple: the real moral crime, i.e. the injustice, according

to the Qur’an, lies in taking or devouring Riba

not in giving it. Thus, the basic initial emphasis of the Qur’an and the state

of Medina, under the leadership of

the Prophet (pbuh) was to abolish the practice of charging Riba,

not of giving Riba. Throughout

this time, the Qur’an condemned those who charged Riba;

it admonished them and reminded them of the punishment that they shall face on

the Day of Judgment for charging Riba,

and then, finally, it gave them the ultimatum that if they do not refrain from

charging Riba, the Islamic state –

under the leadership of the Prophet (pbuh) – shall declare a war against them (Al-Baqarah

2: 279). During all this time, not a single verse admonished those who paid Riba.

They were not threatened with any dire consequences of their act and were never

directed by the Prophet (pbuh) to stop the payment of Riba.

On the contrary, the Qur’an actually directed the lenders to deal with them in a

soft manner: it directed the lender to give the borrower some time to return the

lender’s principal amount, if he was not in a position to retire the loan

immediately. It further advised them that if it be possible for them, they

should even forgo this principal amount as alms and get their rewards for this

generous act in the hereafter.

However, it is quite clear that

taking Riba, in contrast to, for

instance, lying is a two-way transaction. That is, one cannot take Riba, unless somebody is willing [or forced] to pay Riba.

It is this transactional aspect of Riba,

due to which, payment of Riba is

also brought under the ambit of Islamic discussion. It is clear that payment of Riba or, in other words, securing a Riba-based

loan can sometimes come under the scope of “co-operating in a sin”

[5].

This is so because every case of payment of Riba

shall consequently imply the taking of Riba

by the other party of the transaction. And taking Riba, according to the Qur’an, is a major sin.

In view of this fact, Muslims

(individuals as well as states) should do their utmost in avoiding to secure a Riba-based

loan, as this, in many cases, can amount to “co-operating in a sin”. However,

when the provision of a necessity of life (whether at the individual level or at

the collective level) is possible only through a loan, a person (or the

collectivity) may not be left with any option besides securing a loan and

thereby provide for the necessity^[6].

In such a situation, it may be hoped that such an action will not be considered “co-operating

in a sin”, because of the lack of alternatives available to the individual (or

collectivity), in question.

It was primarily in the spirit of

refraining people from cooperating in the sin of taking Riba

that the Prophet (pbuh), after completely abolishing the institution of charging

Riba from the society declared

that (when the society is cleared from the evil) even those who offer to pay Riba

to secure loans for themselves or who silently accept paying Riba

and do not bring it to the notice of the state authorities and those who are

scribes of and witnesses to the documentations for Riba-based

transactions without bringing such transactions to the notice of the state are

accomplices to the crime and therefore deserve to be punished for their acts.

As is quite clear from the foregoing

explanation, the real sin and crime, according to the Qur’an and the life of the

Prophet (pbuh) lies in taking or charging Riba.

Agreeing to give Riba becomes a crime when the society is completely cleared

from this evil and taking Riba is

legally declared to be a punishable crime at the state level.

In view of the foregoing

explanation, it should be clear that the prohibition of Riba

at the state level would primarily entail:

1. Prohibiting its citizens and the institutions operating within the country

   from charging Riba, from any

   other individuals whether residing inside or outside the jurisdiction of the

   state, on any financial transactions;

2. Prohibiting its citizens and the institutions operating within the country

   from charging Riba, from any

   other institutions whether operating inside or outside the jurisdiction of

   the state, on any financial transactions;

3. Refraining itself from charging Riba

   from any individuals whether residing inside or outside the jurisdiction of

   the state, on any financial transactions;

4. Refraining itself from charging Riba

   from any institutions whether operating inside or outside the jurisdiction

   of the state, on any financial transactions;

5. Refraining itself from charging Riba

   from any other countries on any loans or aids advanced to them;

6. To promulgate and implement laws for the punishment of its citizens and

   the institutions operating within the jurisdiction of the state that do not

   abide by the above prohibitions;

7. To promulgate and implement laws for the punishment of such of its

   citizens and institutions operating within the jurisdiction of the state,

   who agree to pay Riba to other

   citizens and institutions operating within the state on any financial

   transactions and avoid to bring such activities to the notice of the state,

   by considering such citizens and institutions accomplices in the crime;

8. To promulgate and implement laws for the punishment of such of its

   citizens and institutions operating within the jurisdiction of the state who

   act as scribes of or witnesses to a Riba-based

   financial contract and avoid to bring such contract to the notice of the

   state, by considering such citizens and institutions accomplices to the

   crime.

It should be kept in mind that the

payment of Riba on loans secured

from individuals and institutions operating outside the jurisdiction of the

state cannot be brought under the scope of any legislation passed for the

prohibition of Riba in a

particular Muslim state. Such payment shall be governed, not by the legislation

of the particular Muslim state, but by the agreement/contract between the

borrower and the lender. The two parties to the loan contract may, at any time,

revise the terms of the contract with mutual consent, and thereby make the

contract coherent with the injunctions of the Islamic law. However, such

revision of the contract can neither be made on the whims, likings or the

religious beliefs of the borrower only nor can it be enforced by the Muslim

state of which the borrower is a citizen.

The government of the Muslim state

should obviously be advised to do their utmost in securing Riba free loans. However, as the saying goes: “beggars cannot

be choosers”, if such arrangement is not possible payment of Riba

shall be made and the contracts fulfilled, without effecting any of the

aforementioned points of the proposed prohibition of Riba

within the Muslim state.

Honoring Riba-based

Commitments

One of the very pertinent and

important questions that is generally asked with reference to the abolition of Riba

is that if at any stage in time, an Islamic state decides on passing a

legislation whereby all Riba-based

transactions are abolished, then what would be the fate of the existing donors

or lenders of such an Islamic state. Would such a legislation or abolition imply

a one-sided revision of all such Riba-based

contracts? Or would the Islamic state continue to pay Riba

on its past commitments, as originally contracted?

In the questionnaire that was

circulated by the Supreme Court of Pakistan, this question, in view of its

practical significance, was also included. The learned Court had asked:

If all the [stated] transactions

are held to be violative of the Islamic injunctions, what will be the

treatment of the past transactions and agreements? Especially what procedure

should the government adopt with regard to the previous foreign loans?

As a principle, it should be

remembered that Muslims, by the clear and direct injunctions of the Qur’an, are

bound to fulfill all contracts or agreements that they have entered into. The

Qur’an, in Al-Maaidah 5: 1, says:

O ye who believe, be

true to your obligations.

At another instance, the Qur’an,

while mentioning the qualities of true believers (Al-Baqarah

2: 177) says:

And [they are] true

to their contracts, when they contract.

Then again, in Al-Israa 17: 34, the Qur’an says:

And honor your promise. Indeed you

shall be accountable for all your promises.

In view of the cited verses of the

Qur’an, it is extremely important that all past and present commitments and

agreements with foreign creditors and donors – without any exception – be

honored^[7].

However, a Muslim state may, in view of its internal legislation, request its

creditors to renew their contracts on any such new terms as the Muslim state may

have to offer. Nevertheless, if the creditors do not accept the terms of the new

contract, the Muslim state shall be bound to fulfill its running obligations.

Under no circumstances, whatsoever, can the loan contract be revised without the

approval of the creditors.

This would mean that payment of Riba

on these foreign loans should be made as was agreed upon between the lenders and

the borrower at the time of the contract or, if possible, on the basis of any

mutual revision of the contract. As has been implied in the previous section,

the Muslim state after passing the legislation to effect the abolition of Riba

shall refrain from taking Riba,

but shall have to pay Riba to its

foreign creditors as per the mutual contract between these creditors and the

Muslim state. The government of the Muslim state should, however, feel the moral

burden of being an accomplice in an act that the Qur’an has forbidden and should

therefore direct all its efforts in retiring the Riba-based

loans of such foreign creditors and thereby relieving itself from its obligation

towards the Lord of the worlds.

As far as the domestic loans are

concerned, the ideal state will be to stop payment of Riba

on these loans with immediate effect, as soon as any such legislation is

promulgated. Nevertheless, such an action would essentially require the Muslim

state to be in a position to retire these domestic loans immediately.

Furthermore, keeping in mind that an

indeterminable amount of the Riba-based

domestic debts have been provided by people whose lives depend on the income (Riba)

generated by these debts, it would be imperative that the Muslim state provide a

non-Riba-based substitute to these domestic creditors and should

then convert the existing Riba-based

debts to the new substitute for all such people who want their loans converted

to the non-Riba-based substitute.

Till

such time, the Muslim state, while meeting its obligations, should, in the light

of the directives of the Qur’an, educate its citizens regarding the intensity

and gravity of the “crime” of taking Riba

and thereby discourage people from such a heinous act.

© Copyright March 2000. All Rights Reserved with the Author