Written by Nayyara Rahman

Muslim jurists have almost always interpreted Riba to cover all kinds of interest, irrespective of the nature and purpose of the loan. The Quran prohibits Riba because interest is unjust as it guarantees a fixed percentage return to the lender whereas the return on business in which capital is invested remains uncertain. Some of the Quranic injunctions are:

“O you who believe! Devour not interest doubling and redoubling and keep your duty to God; that you may be successful. “

And once again:

“Those who swallow interest cannot rise except as he rises whom the devil prostates by his touch. That is because they say, trade is just like interest and God has allowed trade and forbidden interest. To whomsoever then the admonition has come from his Lord, and he desists he shall have what has already passed. And his fate in the hands of God and whoever returns (to it) –And these are the companions of Fire: Therein they abide.”

THEORETICAL AND PHILOSOPHICAL FOUNDATION

 The philosophical foundation of an interest-free economy has been derived from a verse in the Holy Quran which says that God has permitted ‘Baei’ (normal business transactions) and has forbidden Riba (interest), this has to be taken as axiom. Naturally this basic tenet has to be translated into economic principles in the framework of Islamic Economics. Under the existing setup of principles, ‘Interest’ is the remuneration of the factor of production known as ‘Capital’. Logically speaking, therefore, a corollary of this principle would be not to recognize ‘Capital’ as a factor of production; elimination of interest from the framework of Islamic Economics would be illogical, inconsistent and indefensible. Therefore, when the principles of Economics are re-written in the framework of Islamic Economics, we have to start from the point that capital is not a separate factor of production.

A question that naturally arises is that if capital is not a factor of production, what is it in the framework of Islamic Economics and what is its possible role and place in the Islamic activities and in the Islamic economic system? A basic principle of Islam is that business transactions based on normal profit and loss (Baei) are permissible in the Islamic system.  In the same verse where the Quran eliminates and condemns ‘Interest’, it justifies and retains business of normal kind (Baei). This condemnation of interest and justification of normal business with profit and loss in the same verse means that ‘profit’ is recognized as a correct and justifiable payment. The difference between profit and interest is that:

a) Profit is not pre-determined

b) Profit has a liability of loss as well

It may be emphasized that the interest less economy is a basic integral characteristic feature of the Islamic economic system. Interest—simple as well as compound, in cash or in kind, is strictly forbidden in Islam. Charging interest on loans, as well as payment of interest on borrowing is forbidden; and hence all efforts have been made to create a social framework totally devoid of interest. It is a well-known fact the interest plays an important role in the economic systems prevalent in the modern world, but as Muslims we are ideologically committed to abolish interest.

It is therefore advisable to plan the introduction of an interest less economic system .It is worthwhile recalling that the Holy Prophet (PBUH) himself took up the abolition of interest as the last leg of his mission in this world. The Quranic injunctions against interest and the prohibition of interest in all its forms dates very close to the departure of the Holy Prophet (PBUH) from this world .We may also follow in the footsteps of the Holy Prophet (PBUH) and first create conditions conductive for the establishment of an interest less economy before we switch over from the existing setup, where interest provides the motor force to the entire range of transactions at home and abroad. Instead of making a frontal attack on the formidable fortress of interest, we may plan for a strategy of siege around the fortress, whereby we consolidate our gains on some less controversial but most vital sectors of the economic system and having substantially weakened and suppressed the forces that account for the continued necessity and urgency of a high rate of interest, we may plan for the ultimate elimination of interest as a vital factor in our day-to-day transactions.

The abolition of Riba is one of the necessary preconditions of the Islamic economic system. However, it may not be a sufficient condition by itself for the realization of the goals of a welfare state envisaged under Islam. From the social and sociological viewpoint, social justice and equality of access to opportunity may be considered to be the cherished ideals of an Islamic State. These ideals may be realized by according priority to a few other strategies than the abolition of Riba in the initial stages. There have been few instances, where interest-free loans have been provided by the state to institutions and individuals; but the removal of interest alone has not resulted in increasing the efficiency of the production units.

REASONS FOR PROHIBTION

The Holy Quran has prohibited the institution of interest as it inculcates an insatiable desire for money. Wealth is accumulated for its own sake and not for the sake of benefits that it may accrue. The individuals become commercial oriented and profit tends to be the major, if not the sole, motive behind every activity. The transaction of interest necessitates taking another person’s wealth without any consideration or reward. In a society having the institution of interest, the rich grow richer and the poor grow poorer. The Quran says:

“O you who believe! Keep your duty to God and relinquish what remains (due) from interest, if you are believers but if you do (it) not, then be apprised of war from God and His Messenger; and if repent, then you shall have your capital. Wrong not and you shall not be wronged.”

The Holy Quran says:

“Allah has blighted usury and made almsgiving fruitful. Allah loves not the impious and guilty.”

     The first reason due to which interest has been prohibited in Islam is that lending money to people in need for a consideration other than “seeking the pleasure of God” is against the spirit of Islamic teachings. In the second place such a manner of lending and borrowing completely distorts the investment picture of the society, channeling funds into commercially profitable (interest rate determined) as against socially beneficial (needs-oriented) lines of trade and production. The rate of interest becomes the minimum measure of everything, handicapping the entrepreneurial activity and adding to the costs of the consumers.  This violates the principle of Falah and determines the composition of social product not strictly in keeping with the needs and requirements of the masses. The Quran says:

   “O you who believe! Observe your duty to Allah, and give up what remains (due to you) from usury, if you are (in truth) believers.”

Thirdly, the idea of a fixed charge to be paid over and above the principal sum regardless of whether the borrower makes a profit or incurs a loss in itself repugnant enough to be acceptable in a society like that of Islam. It violates the norm of Adel. If the outcome of trade and industry in which the borrowed funds are invested is uncertain, how can the lender of these funds remain altogether insensitive to the uncertainty so incurred?