Title: Riba Vs. Rent - Why is Riba Forbidden? Question: I needed Quranic references that give reasons for forbidding Riba as the arguments for selfishness are little debatable if we consider it to be interest? What about renting, does it have any real difference with Riba ? Answer: Before I give the Qur'anic references for the reason of forbidding Riba , let us first examine the difference between Riba and rent of a property. 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, 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; In case of a real asset, transfer of the possession of the existing 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 sale of financial assets - like money - can only take place in the shape of credit sale. 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 financing agreement, the seller offers to sell his real asset (for instance land) for the 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 the above 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 is received; and It requires the tenant to return the original (full - i.e. 100%) 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 at the time the rental agreement was contracted). In the absence of these clauses, it is quite obvious that a rental agreement is distinctly separate from a Riba -based loan or financing agreement. Now let us see why the Qur'an has prohibited Riba . One of the reasons specified by the Qur'an for the prohibition of Riba ( Al-Baqarah 2: 279) is that taking Riba is a case of injustice, that is there is absolutely no justification of adding any amount to the principal amount lent. Another reason that can be derived from the placement of the directive regarding prohibition of Riba is that it makes a person apathetic towards the needs of other human beings, the society in general and God's deen. Riba has the potential of inculcating in a person the spirit of indifference towards the needs of others, which could have extremely adverse effects on the individual as well as the collective morality of a people. This reason, as I have stated earlier, can be derived from the placement of the directive regarding the prohibition of Riba in the Qur'an. The Qur'an, in about all the places that it has mentioned the prohibition of Riba has contrasted it with spending for the help of God's deen or for the needs of another person or for the needs of the society, in general. For instance, in Surah Al-Baqarah , God has directed Muslims to spend for the needs of others as well as for the cause of Islam (261 - 274). After this directive, God has mentioned those who in their greed of earning Riba hold back from spending their money for the general good of the society and God's deen (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. The same contrast has also been made in Aal Imraan 3: 130 - 134 (especially with reference to the needs of God's deen , with particular reference to those who held back from spending in God's way at the time of the battle of uhd ) and Al-Room 30: 38 - 39 (especially with reference to the needs of a person's relatives and the destitute). In a nutshell, the reasons for the prohibition of Riba , as derived from the Qur'an are: 1) It is a 'zulm' - injustice; and 2) It adversely affects the spirit of empathy towards others, which is required for success in the life hereafter. 20 th December 1998