The Qur’an prohibits charging of riba but does not precisely define it. The Hadith elaborates and expands the scope of riba but it also does not give a precise definition of the term. This is because of the fact that the concept of riba was not vague in the society in which the term was being used. Everybody knew what riba was and what conditions in a transaction involved the practice of riba. Charging interest on loan was not a new concept with which the Arabs alone were acquainted.

The  Jews had been practising riba for the past two thousand years but when the Old Testament disallowed this practice it also did not define what riba or original Hebrew words neshkekh and turbith implied. The concept was as well known as the concept of rent or wages is known to us. And in case any instructions are to be given about rent or wages it would not necessarily require one to provide an introduction to the term. It was this background that rather than particularising the term in words leading to prevarications by scrupulous persons it was the practice that was banned and this practice encompassed much more than what the explanatory wards could convey. What indirectly one may infer from the Qur’an as also from the Old Testament is that riba implies any increase on the principal amount lent out. Thus the Biblical provisions like

“... take thou no usury of him or increase: but fear thy God: that thy: brother may live with thee” (lev. 25-36) and,

“... that hath taken off his hands from the poor that hath not received usury nor increase, hath executed my judgment, hath walked in my statutes, he shall not die for the inequity of his father, he shall surely live” (Ezekiel 18:7,16,17), give us an idea that increase on the amount lent out is the essence of prohibited riba. Similarly the Qur’anic ordinance “And if ye repent then ye have your principal (Sura II verse 279) also suggests the same concept. Thus the concept customarily known and understood was taken for granted and no further elucidation was deemed necessary while banning the practice. Later on, too, the Muslims never doubted the interpretation of the term. Thus the Muslim scholars were convinced that the prohibition of riba was equally applicable to loan and the barter transactions, to consumption loan and to commercial and productive loan, to private loan and to government loan, to loan advanced to physical persons and to those advanced to legal persons like the trust and the treasury, to charging fair rates and to charging exorbitantly. This prohibition was extended so much that invisible and non-tangible increase on loan was also abhorred and brought in purview of prohibited riba so much so that some ulama suspected the element of riba in case of those loans which were payable at some other destination, for fear of the lender’s availing of the benefit of transport cost and security.

In spite of redundance of introducing to the followers the concept of riba the early exegetes of the Qur’an did try to present the concept and institutions that were addressed by the Qur’anic injunctions.

According to Tabari, ”Riba is that increase which accrues to the lender on account of deferred payment due to extension in actual period of loan”. (Tafsir Ibne Jarir Tabari).

According to Ibn Arabi, riba means “increase” and here (in the Qur’an) it indicates that increase which has no wealth (mal) corresponding to it (Ahkam-ul-Qur’an).

According to Razi, “Riba comprises two forms; the one is riba on loans (nasia); and the other, on hand to hand transfer (naqd). Riba on loan has been a well-known and familiar institution since the pre-Islamic days.

People used to lend money on the condition that a specific amount would be payable monthly as interest and that the principal amount will remain to be paid. When the fixed time came the lender demanded his amount. Should the borrower not be in a position to pay, extension in the date was granted subject to enhancement in the rate of interest”. (Tafsir Kabir).

According to Abu Bakr Jassas, “one type of riba is practiced in exchange while another, in transactions other than exchange. This, latter form of riba, was prevalent in Arabia. It was lending out money with the condition of paying back along with an increase over and above the principal. (Ahkam-ul-Qur’an).

The first century commentator, Mujahid, interprets riba as the reward for waiting.

According to another exegete, the real interpretation of the injunctions of prohibition of riba is that Allah has prohibited receiving of more than the principal lent out”. (Tasfir-e-Mazhari, by Sanaullah Panipati).

The above interpretations suggest that any sort of increase on the principal amount, whether in credit transaction or on loan, irrespective of the rate being simple or compound and whether payable on some future date or on deferment of the date, is treated as riba in the Qur’an. Increase on principal is perhaps the briefest possible interpretation of riba which can be derived from the above elaborations. A study of the institution of loans in pre Islamic Arabia also suggests the following theories of riba.

(1) Riba in those days was treated as a reward for waiting. This point has already been 

     explained by reputed exegetes like Tabari and Mujahid.

(2) Riba, in many cases, formed the amount of the risk element involved in loan. This

      contention is supported by the fact that in Arabia, riba in most of the cases was not

      charged on loans covered by pledge or surety. Even the Qur’an has supported the

       practice of covering the risk element with such pledges. It lays down:

“O ye who believe when you contract a debt for a fixed term, record it in writing. Let a scribe record it in writing between you in (terms of) equity…

If ye be on a journey and cannot find a scribe, then a pledge in hand (shall suffice)” (Surah II 282, 283).

The Jews also some times did not charge riba on mortgaged loans if the same was paid off within a fixed time. The Holy Prophet was indebted to a Jew whom the Prophet had pledged his armour against a credit purchase. The debt was free of interest.

As regards the former theory, the Qur’an does not believe in any reward for waiting because loan in Islam is more a matter of social and moral obligation than a pure business phenomenon. The Qur’an goes as far as to recommend the remission of principal itself if the borrower becomes a destitute. It provides, “If the debtor is in straitened circumstances, then (let there be) postponement to (the time of) ease; and that ye remit the debt as alms-giving it would be better for you if ye did but know”. (2:280) This verse, in fact, reveals that in Islam reward for waiting is not justified. That is why increase of sale price on deferred payment over the one quoted for spot payment is also termed as riba. This involves simply waiting and the mere time element does not entitle one to claim pecuniary returns. The Prophet said, “Do not quote two prices of the same commodity, the cash price and the credit price”.

A number of Qur’anic verse regulate the tendency of holding idle wealth and enjoin upon Muslims not to hoard wealth in the face of a demand for spending for the sake of social uplift and welfare. Muslims are required to be moderate in spending on themselves and abstain from lavish expenditure. This moderation and abstinence are Qur’anic directives. And practicing upon Qur’anic directive does not entitle one to a worldly or pecuniary reward.

This discards the concept of a reward for abstinence. Allah, however, makes this virtue rewardable in the hereafter.

The above lines should be taken to mean that moderation in spending and abstinence from prodigality would lead to private hoards of idle wealth. The Qur’an channelizes these savings into social causes:

“And in their wealth the needy and the destitute have due share”.

(51:19)

“And in whose wealth there is a right acknowledged for the needy and the destitute”. (70:24,25).

“Give the kinsman his due, and the needy; and the wayfarer, and.:

squander not (thy wealth) in wantonness. Lo the squanderers were ever brothers of devil and devil was ever an ingrate to Allah”. (17:26-27)

In the above verses the word ‘saa-el’ has been literally translated as needy which, in fact, does not necessarily mean destitute or a pauper. For the latter’ sense, the word ‘mahroom’ is used. Saa-el is derived from ‘suwal’ which has been used in the Qur’an to convey meanings namely question, ask, request. The word has been used in the Qur’an at about 100 different places and everywhere conveys the same meaning. The Prophet once said “A saa-el has a right even if he maybe (visiting you) on a horse-back”. Here also the word Saa-el does not mean a pauper or a ‘faqir’ but the one who requests (or say, appeals) for something even if he be a rich man. The second significant point in above verses is but procedural. One is not insisted upon to necessarily distribute among saa-els or give them alms’. The only words used are: “And, in their wealth is a right acknowledged for the saa-el and mahroom”. This gives us a choice to determine the most socially, desirable and useful way of providing the different claimants of savings.

While the essence of the points of contrast between riba and sadaqa is clearly spelled out in a number of places in ‘the Qur’an the underlying” difference between trade and riba has not been hinted out except the fact that the former is lawful and the latter is unlawful. This lack of explanation is meaningful perhaps due to the fact that the devourers’ argument that “trade resembles riba” is not based on real misunderstanding and confusion; it is based on an effort to deliberately jumble up the two distinctly different phenomena. It is interesting to find that even in the present state of academic achievements in economic literature there are persons who are found to ignore the distinction between the two different factors and between a factor and return on another factor. They erect the edifice of their arguments on comparing the two incomparable phenomena.

While studying the Qur’anic verses it is evidenced that in the course of censuring interest, philanthropy, and Qard-Hasan is always greatly emphasized while accumulation of wealth is condemned. Only at one place riba and trade are mentioned together; the former being declared illegal and the latter legal. This leads us to relative appreciation of the three phenomena, philanthropy, trade and interest. The theory which the Divine scripture advances is that “which ye give in usury in order that it may increase on other people’s property hath no increase with Allah but that which ye give in charity seeking Allah’s countenance, hath increase manifold” (30.29).

This simply means that the Qur’anic theory of general welfare discards the practice of riba and rests on the general spirit of philanthropy. The spirit of this philanthropy discards the concept of reward for virtues like waiting and abstinence from personal consumption. Whether this “theory” is based on economic impact of riba or the moral and social impacts is yet to be elaborated. The point has been hinted out in another verse. “Allah hath blighted usury and made philanthropy fruitful”. Here the far-reaching economic repercussions are revealed and the economic position of philanthropy is elevated. This revelation is supported by several traditions. The Holy Prophet said “Riba i.e. (economy based on Riba) seems to have flourished but the ultimate result is scarcity and contraction” (Imam Ahmad, Musnad) Further “debauchery and riba lead a nation to ruin”. (Ibid)

In the verse finally prohibiting riba Muslims are advised to claim only their principal but not any interest thereon. This phrase following the instruction “Do not wrong; you would not be wronged”, on the one hand implies that claiming anything more than the principal is wrong, and, on the other, it also implies that nullifying riba would not mean eating up the principal too. It is a simple inference from the verse and does not provide any argument to those who claim that the verse condemns only that increase which is oppressive or the one that perpetrates Zulm.

Similarly, the verse “Do not devour interest doubled and redoubled” often leads to the misunderstanding that the verse covers only excessive rate or compound rate of interest and exempts what is now known as simple, fair or legal rate. This misunderstanding has to be cast aside on different grounds:

(1) It is an intermediate verse, while the final injunction “And if you repent then ye have your principal” leaves no room to accommodate any such misunderstanding.

(2) Doubling and redoubling or interest is a phenomenon that takes place at any rate of interest. Suppose the lending rate is 2% per annum.

Charged without compounding the annual increase of interest on a loan of Rs.100 will be as follows:

At the end of 1st year    =             Rs.          2.00

“          “       2nd year         =             Rs.          4.00

“              “       3rd year     =             Rs.          6.00

“              “       4th year      =             Rs.          8.00

It will be seen that the amount of interest doubles at the end of the second year, triples at the end of the third year and redoubles at the end of the fourth year.

(3) Excessive and moderate or fair and exorbitant rates are relative terms and do not provide any absolute standard. These depend on the condition of supply of and demand for loanable funds, on the purpose and period of loan, on security offered and on the status of borrower. A particular rate may be termed fair in one case and unfair in an other; fair at one place and exploitative at another.

On January 1, 1990, for example, deposit rates in different countries ranged from 2.75% (Japan) to 28% (Columbia). These rates also differed from period to period. In Switzerland, for example, average deposit rate in 1984 was 3.8%; in January, 1990 it was 9%. In Norway, in 1984 the rate was 5.30%; in January, 1990 it was 9.64%. Lending rates similarly vary. In U.K., the average lending rate during 1984 was 9.65%; on January 1990 it was 15%. In Italy, during 1984 the average lending rate was 20.38% which came down to 14.30% by January 1990. In Australia, the average lending rate during 1984 was 14.46% which rose to 22.75% by January, 1990. In Venezuela, in 1984, the average rate was 9.75%; in January 1990 it was 30.68%. As to average lending rates at different places on January 1990, Japan averaged 5.49%, Germany 10.91%, U.K 15%, Greece 24.29% and Columbia 28.90%.¹

We have not included, in the above list, the extraordinary deposit rates that are offered in countries like Brazil (3,777% January 1990) and Yugoslavia. (7,159% January 1990).

All the rates of interest quoted above are judged as legal rates, just rates and fair rates in their respective economies. Charging 29% would be deemed excessive in Japan where average lending rate is 5.49% but it would be termed fair and legal in Columbia. In U.S., the average lending rate is around 10% but in some States legal rate on installment credit is as high as 40% or even more.

The above discussion would render the argument of moderate or fair rate as a ridiculous proposition. In case such an argument should be tenable in

Islamic law the Ulama in Columbia would call 30% as fair rate but the Ulama in Japan, U. K, U.S.A., Kuwait and Switzerland would treat it to be excessive and Haram. That is why abstract adjectives are not recognized the standard of ratio legis or illat of Islamic law. This rule applies universally in case the value needs to defined in terms of quantity. This is as much true in the case of interest as it is in the case of wages and salaries, profits, rent and hire etc. High or low fair or unfair are relative terms and do not necessarily represent a good or a bad value.

(4) Of late some scholars make a distinction between usury and interest, the former adopted as the literal translation of prohibited riba while the latter as a concept not involving riba. It will not be out of place to point out that the English word ‘interest’ on loan in the sense known today was not used in English language when the Bible was first translated into English. The only substitute in English for any amount of increase on loan was termed as usury, which was understood to be what we now understand by the word interest. Drawing a line between the two terms, according to Oxford dictionary dates back to 16-17C.This was not the 15th century sense of English interess. The same source reveals that the crime of usury before Reformation consisted in taking of any interest for the use of money and now in taking of higher rate of interest than is authorized bylaw. It is thus curious that much of the debate on the religious position of interest has been based not on the actual sense of the original word; but on the terminological sense which the translated words now signify. It is, in fact a logical misinterpretation of Biblical precepts as also of Qur’anic.

Recently a fresh but equally fallacious argument has been put forward to create misgiving about the interpretation of the concept of riba. It is argued that the Islamic requirement of maintaining equality in return of loan admits of equality in value but not in quantity or amount. And because the real value of money is falling so the borrower, in all fairness, should be required to compensate the fall in value by increasing the amount of borrowed fund proportionately. This is the essence of indexing financial obligations. The argument has been challenged on moral, legal, economic and financial grounds.²

Riba in Hadith

A remarkable affinity between the Biblical and Islamic approach is discernible in the prohibition of increase on loans of victuals. The O.T. provides:

“... Thou shalt not give him thy money upon usury; nor lend him thy victuals for increase” (Leviticus 25:37).

While the O.T. generalizes victuals the Hadiths narrated on the authority of the Holy Prophet mention the most traded items in Medina, in addition to bullion. Thus Hadith provides: Gold for gold, silver for silver, wheat for wheat, barley for barley, date for date, salt for salt (should be exchanged) equally and on the spot. Inequality on the spot or deferment in exchange would involve riba. Thus while O.T. bans quantitative increase the Hadith bans qualitative increase of commodities to either party. Instead the Prophet advised the Muslims to first sell the commodity for money and then repurchase the same specie in case it is inferior or superior in quality.

The conditions of exchange of commodities of similar specie laid down in the Hadith practically disallow spot exchange too because nobody would care to exchange exactly similar specie nor would anybody like to willingly accept inferior quality in exchange for the specie. However, in case one of the specified specie is exchanged for another the relative quantities are to be mutually settled. The best alternative that the Hadith lays down is sale of one for money and purchase of the other for this money.

The Holy Prophet’s emphases on abstaining from interest through avoiding barter seems to be a very bold step in the agricultural economy of Medina specially when the use of money was not very popular in Arabia and people generally used Persian and Byzentine coins or sometimes bullion. The object of this emphasis seems to be discouraging inequitable exchange of counter-values and as the latter scholars concluded, was closing the backdoor to practicing riba. The Hadith concept of prosperity is thus not different from that of the Qur’an. The Holy Prophet is reported to have observed “(Economy based on) riba seems to have flourished but the ultimate result is scarcity and contraction (Masnad Ahmad). Further, “debauchery and riba lead a nation to ruin” (Ibid,).

Riba in Fiqh

As already stated above the concept of riba was not vague to the early Arabs as it was not to the early Jews or Christians. Any increase on loan came in purview of riba without having to use any reasoning or logic. What required reasoning and analogy was the nature of riba as involved in barter dealings which was banned by the Prophet. It was here that even Caliph Umar wished the Prophet himself to have elaborated the point before his death. And it was here that the Muslim jurists (fuqaha) have tried to use their analogy in interpreting the Hadith on the subject and broadening the scope of the application of Hadith in different ways. It is no surprise to find that the fuqaha have generally discussed the subject under the heading of sarf (exchange of money for money) or as a sub-heading under chapter on bay or trade. Only few fuqaha have discussed the subject also under the heading of loan (Qard).

While discussing the subject under bay or trading some scholars enlarge the specific items only to all species of victuals some others extend it to cover all the commodities whose quantity can be precisely determined by weight or measurement (but not by counting). In spite of this divided opinion in theory difference in disapproving the riba- infused transactions are practically negligible. The spirit behind this prohibition, according to some scholar has been plugging the loopholes to practicing interest by scrupulous persons and curbing exploitative exchanges in barter. Guided by this spirit the fuqaha have meticulously discouraged all tangible and non-tangible, monetary and non-monetary return on loans. Their unyielding approach to manifestations of riba is comparable with the Scriptuaries.

* The author is a retired Chief of the Research Department of State Bank of Pakistan.

 1. For all figures refer to I.F.S. (May 1990) p.68

2. S.M. Hasanuz Zaman “Indexation An Islamic Evaluation”, Journal of Research in Islamic Economics (Jeddah) Vol.2 No.2pp.31-53