1. A proper understanding of riba is pre-requisite for appreciating what needs to be avoided as also for the appropriate course of action to be adopted in that regard.

What is Riba?

2. Riba is traditionally viewed as a predetermined, fixed and time-related excess over and above the principal of a loan (Or debt created in lieu of a credit transaction). A distinction is also maintained between Riba al-Nasi’ah (riba in loans) and Riba al-Fadl (riba in trading).
Several explanations are offered to rationalize the Ahkam on riba, the most important being an end to zulm (exploitation or injustice). Occurrence of zulm is often traced to lenders seeking a return while borrowers might be in dire need of funds. Another conclusion drawn- with reference to the permissibility of bai’ (trading) -is that guaranteed return claimed by owners of capital is despicable because other economic agents have to exert effort and/or expose themselves to risk for seeking any gains. While these explanations may have some element of truth in them, they leave much to be desired. For example, they become less convincing when one finds that Shari’ah does not prescribe any ceiling on prices and, thereby, the rate of profit even when trading activities may carry little or no risk.

3.1 A correct approach to understand riba would be to treat it as a technical term in the Qur’an and Hadith, like salah, saum, zakah and hajj, and to determine its meanings with reference to these two primary sources of Islamic knowledge. Briefly, the argument can be understood with reference to the basic edict on riba in the Qur’an. In the light of al-Baqarah 2:279 which restricts creditors to their principals this decree can be stated as follows:
All loans and debts must be settled on an equal basis (in terms of the units of the object of the loan/debt).
That is, if Rs.100 were lent, only one hundred rupees—by counting— can be taken back. If 10 kilograms of wheat were borrowed, exactly 10 kilograms of wheat must be given back. The same principle is to be followed in retiring debts created in lieu of, for example, sales (purchases) on deferred payment (delivery) basis. If a loan or a debt is not handled in this manner, it would constitute a violation of the Ahkam on riba and hence, give rise to riba.

3.2 Given that a loan transaction involves giving and taking back of items of the same kind and that legally the lender is not a party to the use of the object of loan at the borrower’s end, riba may be defined as follows:
Riba is a discrepancy which results from the contractual obligations of a party in the context of a direct exchange of items of the same general kind between two parties.
Important terms in this definition are discrepancy, contractual obligations, direct exchange and items of the same general kind, while time, predetermination and fixity are important omissions. These points ma be seen as below.

3.3 The proposed definition emphasizes that riba is a discrepancy— not just an excess as in the case of interest. While the case of a lender claiming an excess over and above his principal is all too well-known, mathematically the opposite case of shortfall — negative excess— is also possible. This would occur if the arrangement between creditor and debtor allows for settlement of debt by the indebted party paying less than the principal and the difference going to the creditor. For example, current accounts are loan transactions for all practical purposes with the depositors and the banks being lenders and borrowers respectively. In this case, if a bank claims in its favour some fee— such as fee for cheque slips— for withdrawal of funds, the depositor would get back a sum equal to his principal minus the said fee. The lost sum, however insignificant, is negative riba from the point of view of the creditor in the transaction. A more familiar case of the discrepancy as a shortfall is found in the otherwise like-for-like exchange of old and decomposed currency notes for new ones in the open market. When a person exchanges an old note from a money- changer, he usually gets a sum less than the face value of his note. Thus the give and take back process leads to the customer, the giving party in the transaction, getting less than the sum originally given.

3.4 The Prophet SAW is on record to have voluntarily given more than what was due against him. This implies that discrepancy in a loan transaction would be riba only if it is related to the contractual obligations of the concerned party.

3.5 The meaning of direct exchange can be best appreciated by noting what would not be a direct exchange, albeit an indirect exchange. If a person lends money and wants money in return without being a party to the use of that money in any sense, this is a case of direct exchange. On the other hand, when the Prophet SAW advised Bilal (RA) to sell his inferior quality dates at market price and buy good quality dates with the sale proceeds, the Prophet SAW was recommending an indirect exchange of dates of two different varieties— though of the same general kind — based on their respective market values.

3.6 The proviso ‘items of the same general kind’ stems from the fact that in a loan transaction, things given and taken back are similar though not identically the same (see below, 4 3) In this regard, several Ahadith also conclusively establish that qualitative and other superficial differences (between items at both ends of the exchange) are to be ignored in assessing riba. For example, as noted above, dates are to be viewed as dates even though those given and taken back maybe of two different varieties.

3.7 It is noteworthy that according to the above definition, the relation of ‘discrepancy’ in payment to (i) time, (ii) its predetermination in the contract and (iii) its fixity— three cardinal features of present- day interest rate —are not critical to the existence of riba. This is because the length of time lag, predetermination of the rate and its fixity are inconsequential for the basic nature of a loan transaction mentioned at 3.2 above; the things given and taken back in a loan are of the same kind and the lender (giver) is not a party to the use of the thing lent at the borrower’s (taker’s) end during the pendency of the contract.

3.8 The aforementioned definition is general. The only exception traceable to the Hadith sources is camel-for-camel loans. According to a Hadith, on the eve of a ghazzwath the Prophet SAW authorised his official to take one camel on the promise of giving two camels in return. One likely explanation of this case is as follows. When someone lends a camel, even if the same camel is returned, it is not likely to be better than before — in terms of age, weight and other features. This is contrary to ordinary loans where practically lenders have to concede transaction costs and thereby get less in real terms than that given (see below, 4.3). Thus, apart from transactions comparable to camel-for-camel type loans all other direct exchanges of items of the same general kind fall under the purview of the above definition.

Hadith and Riba

4.1 Drawing inferences from the Ahadith on riba is a complex matter. To be on the safe side, the subject should be approached in two stages: (i) interpretation of the texts of the various Ahadith, and (ii) derivation of the necessary Ahkam from them.
Interpretation of Texts of Ahadith on Riba
4.2 The following principles should be observed for drawing the necessary conclusions from the Ahadith:

i. The Ahaclith should be interpreted in the light of the Ahkam in the Qur’an.
ii. Because the Ahadith are essentially oral text and some differences in the details are but natural, one should not restrict himself to a literal interpretation of a given text. Rather, the approach should be as follows:
(a) The Ahadith should be interpreted with reference to the practical cases they cover; and
(b) Common meaning, if any, in the various Ahadith should be emphasised while drawing the necessary conclusions.

4.3 Some hidden dimensions of the Qur’anic Ahkam. Before dilating on the subject matter of the Ahadith, it is desirable to take note of some so far neglected aspects of the Qur’anic Ahkam. All loan transactions entail in varying degrees three costs for the lenders: (i) lending cost; (ii) cost in terms of income foregone until the object of loan remains in the possession of the borrower; and (iii) recovery costs. The latter two types of costs are commonly recognized. As to the first, to say the least, one may claim that anything lent embodies cost of the lender’s past efforts in acquiring it, generally recognized as earning costs. Suppose X lent Rs.5,000 to Y for five years and the said costs amount to Rs.500. As per the Ahkam on riba, Y is to pay back and X to receive Rs.5,000 by counting. Thus, though X may get back Rs.5,000 by counting, one might say that he conceded the Rs.500 cost. Put differently, one may say that Rs.5,000 in X’s hand equal Rs.5,000 minus Rs.500. That is, the amount given and that taken back, though nominally the same, are in fact different in qualitative terms. Keeping these factors in view, one can deduce the following corollaries of the principal edict on riba stated at 3.1:
Corr. 1: In a like-for-like exchange of rupees or something else, the lender must concede his costs (associated with loaning).
Corr. 2: The lender must ignore the qualitative differences between the thing given and that taken back, and treat the two as the same in terms of the relevant unit of exchange— rupees in the case of loans denominated in rupees, tons (bushels) for wheat lent by tons (bushels), and so on.

4.4.1 Now one can see the position of the Ahadith on riba in relation to the concept of riba given above. The Ahadith on the subject are mostly about trading matters. The relevant Ahadith mention trading of gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt — six items in all. There is also a mention of heterogeneous exchanges in these items, such as gold for silver. While strict equality in terms of the chosen units for exchange is ordered for all like-for-like exchanges (such as gold for gold), the rate of exchange for heterogeneous exchanges (such as gold for silver) is left at the discretion of the trading parties. Nevertheless, in all cases a further restriction is prescribed whereby the said exchanges ought to be on a spot basis.

4.4.2 Gold for gold exchange, for example, refers to the case in which one party had gold in the form of, say, jewellery and the other in the form of dinars (gold coins at the time). The jeweler was interested in claiming his manufacturing costs in an otherwise gold-for-gold transaction (with jewellery at one end and dinars at the other). But given that suppliers of loans in gold could not claim — or had to concede— their lending costs as per the Qur’anic Ahkam, how could the said jeweler’s claim be given an exceptional treatment. Accordingly, we find that the Prophet SAW ordered the said exchange to be carried out on an equal basis, in terms of weight— the standard for exchange of gold.

4.4.3 The ‘hand to hand’ restriction in the Ahadith dispenses with even the remotest possibility of a discrepancy arising in the above changes. That this is indeed the case may also be seen as follows:
Suppose a person X needs some silver that another person Y has, but Y is interested in gold that X does not have. According to the texts of the relevant Ahadith, X cannot enter into a trading transaction with Y on the promise to pay an agreed of gold at a future date. But there is no bar on X to fulfil his need through borrowing the same amount of gold from a third person Z (of course, to be returned on a riba-free basis) and buying the requisite silver at the same ‘rate from Y on spot basis. The only difference between the two arrangements is that X becomes indebted to the, seller (Y) himself in one case and a third party (Z) in the other; claims against the debtor (X) and in favour of the creditor (whether Y or Z) remain the same in both cases. This being so, it is difficult to see that the hand-to-hand restriction itself has something to do with riba: its violation may lead to, but not necessarily result in, riba.

4.4.4 In order to remove any doubts about the above interpretation, it is worth mentioning here that the said Ahadith do not prescribe that such transactions “must” be carried out. Rather, they just set the principles for this class of transactions. And, as noted at 3.5 above for a. dates-for-dates exchange, if this does not suit any party, it can always make a recourse to other means.
4.4.5 The Ahadith with an emphatic mention of riba being in Nasi’ah (or loans) are not to be taken literally. The message is that chances of riba arising, are greater in loaning than in other case, as above.
4.4.6 Riba is riba. The traditional dichotomy between Riba al Nasi’ah and Riba al-Fadl, in the Fiqh literature needs reconsideration. It does not serve any new purpose, to say the least.
Derivation of Ahkam from Ahadith on Riba

4.5 As far as deriving Ahkam from the Ahadith is concerned, the correct approach would be as follows:
i. The observance of the guidelines set by the Prophet SAW is mandatory — in letter as well as in spirit — in respect of the six goods pointedly mentioned in the Ahadith, because Allah SWT has ordered the believers to accept unconditionally what the Prophet SAW expressly gives and stay away from what the Prophet SAW prohibits (al-Hashar 59:7).

ii. As for extending the scope of the Ahkam. to like-for-like trading in other items, riba in the sense of discrepancy in the give and take back process (see 3.2) would be critical. of course, where applicable, additional Shari’ah restrictions for permissible forms of transactions, such as avoidance of gharar, would constitute binding considerations.

iii. The Ahadith should be explored to derive Ahkam for forms of transactions in the marketplace. For example, there should be a ban on money-changers trading rupees for rupees on unequal terms. Goldsmiths should be required to exchange old jewellery for the new on the basis of weight (after separating the precious stones) without applying a cut for any impurity in gold or making a claim for their manufacturing costs. Likewise, while indirect means may be adopted to meet the needs of the concerned parties, as in the case of Sayyidena Bilal seeking good dates in exchange for inferior dates, needy persons might be required to enter into contracts with two separate parties.

Some Misgiving about Riba

Riba, Interest and Usury

5.1 Interest is a pre-determined, fixed and time-related excess on loans. But as explained above, riba is a much broader concept than this. Riba stems from a violation of the Qur’anic decree that loans and debts must be settled on an equal basis (see 3.1). As discussed at 3.7, time or length of time are not critical for riba since the basic nature of the transaction in which riba arises is time-invariant. Predetermination of the return and its fixity or variability also do not matter for the same reason. In view of all this, it is fair to conclude that in fact interest is a special case of riba not the other way round.

5.2 Interest vs. Usury distinction is irrelevant for adjudging riba. Likewise, the purpose for which loans are taken is also unimportant for purposes of riba.

5.3 At present, bank transactions involving interest come under the purview of loan transactions. Thus bank interest is riba. That modern banks have no precedence in Islamic history is no ground for treating bank interest differently from riba for two reasons. First, notwithstanding their complex nature, banks still personify groups of individuals — their shareholders. Hence, the Ahkam of riba applicable to individuals automatically carry over to banks. Second, again not withstanding the complexities of modern transactions, they are still combinations of primary transactions — such as lending, trading, leasing, partnership, etc. — for which the Ahkam are originally prescribed. As such, therefore, from the transactions angle too, banks cannot be given a special treatment in the application of the Ahkam on riba.

5.4 Any change in the nomenclature of interest to ‘mark-up’ or ‘profit’ is inconsequential from the point of view of riba as long as the basic transaction between banks and their customers remains a loan transaction.

Riba vs. Profits

6.1 Riba arises in loans, and profits in trading. Loan transaction represents a case of temporary exchange— give and take back — of property rights of the thing at hand for the pendency of the transaction. Trading, on the other hand, is a case of irrevocable exchange of property rights between two parties: ownership of the object of sale goes to the buyer and that of the thing paid toward price to the seller. Alternatively, one may view the loan transaction as a homogeneous exchange and trading: as a heterogeneous exchange. Thus riba and profits relate to two different situations with their own legal implications. Accordingly, any comparison between the two is unwarranted. Incidentally this point also applies to profits versus interest comparisons.

6.2 Economists have viewed profits as reward for risk-taking. This interpretation is only partly true Primarily, as mentioned above, profits arise in trading whereby two parties are involved in the process of reciprocal and irrevocable exchange of their property rights, On the other hand, lending involves transfer of property rights only for the pendency of loan— a limited period. The claim to a reward from another party through loan transactions, albeit riba, is not recognized in Shari’ah.

Riba vs. Return on Government Savings Schemes and Government Bonds

7. Deposits in government-sponsored Savings Schemes, Defence Savings Certificates, Treasury Bills, Federal Investment Bonds, Foreign Exchange Bearer Certificates and their likes, are all debt instruments. From the Shari’ah point of view all these instruments represent “loan” contracts between the government and the parties subscribing to these instruments. The holder in each case gives money and wants his money back, and there is no other contract governing the legal relation with the issuer of these instruments In a technical sense, therefore, these are all direct money-for- money exchanges. Accordingly, interest, mark-up or “profit” offered on them is riba. The same argument also applies to zero-coupon bonds in which case buyers pay a lesser price initially but receive a greater sum equal to face value of the bonds.

Riba vs. Rent, Modarabah, Musharakah, Muzara’ah and Musaqaat

8.1 Rent arises in a lease contract that involves the transfer of usufruct of an asset while ownership remains with the lessor. This is essentially a different arrangement as compared to a loan contract. Therefore, there is no point in equating rent with riba. Alternatively, one can say that, for example, house rent is not riba because the tenant and the landlord enter into a transaction of money for housing services— a heterogeneous exchange — whereas riba arises in give and take back of items of the same kind.

8.2 In modarabahah and musharahah — two forms of business partnership — the financier is also a legal party to the use of funds. Thus these transactions are fundamentally different from a loan transaction. Accordingly, both these transactions are outside the purview of the Ahkam of riba. Similarly, muzara’ah and musaqaat — two special cases of partnership — as such have nothing to do with riba.

Riba vs. Difference between ‘Cash’ and ‘Credit’ Prices

9.1 Suppose a shopkeeper sells a pair of shoes for Rs.500 to one customer against cash payment, and he charges Rs.700 from another client who agrees to pay after a year, The difference between Rs.500 and Rs.700 would not be riba because these are two separate transactions both of which are to be subjected to the Ahkam of Shari’ah independently of each other.

9.2 As to the case of a shopkeeper citing Rs.500 as cash price and Rs.700 as deferred payment price to the same customer, the difference would again not be riba because no actual transaction is taking place. Suppose the customer bought the shoes for Rs.700 to be paid after one year. As a result, Rs.700 would become a debt against him, and the Ahkam of riba will apply to this debt — not to the excess of Rs.700 over the cash price of Rs.500.

Relationship between Zulm and Riba

10. Riba may lead to zulm, and thus prohibition of riba would result in putting an end to exploitative practices. But it does not necessarily follow that an end to zulm is the genesis of the prohibitions of riba. Tracing of the said rationale behind the prohibition of riba to al Baqarah 2:279 is mistaken for two reasons. First, the Ayah points to the existence of some dispute between two parties that was settled through this Ayah, while the end-of-exploitation explanation is given independent of the nature of the dispute. Second, the factual position was that according to this Ayah, both creditors and debtors were directed to give each other their respective rights in the light of the Ahkam in force at that time. These Ahkam are given in Aale Imran 3:130 (revealed in Shawwal 3 AH) and al-Baqarah 2:275 (revealed in late 3 AH or early 4 AH). In both instances, the directive was that loan transactions be contracted and debts retired on equal basis, and there is no mention of zulm or its equivalent.

Indexation of Loans and Debts for Inflation

11.1 The problem of indexation is traceable to the concerns of Islamic and other scholars about changes in the value, albeit the purchasing power, of money in inflationary situations. The usual plea is as follows. Even though riba (interest) is prohibited and a lender cannot claim an a priori fixed return on his loan, he must be compensated for loss in the purchasing power due to inflation. This may be done through indexation of loan contracts to compensate for inflation. Practically, the said goal may be achieved by indexing a standard loan contract to either the price of a commodity, a basket of commodities or some other monetary unit. — Indexing a loan contract to, say, the price of a commodity may also be taken to mean that the loan be denominated in terms of that commodity.

11.2 The main argument in support of the above view is two-fold. First, the above action would be in line with the Qur’anic decree that neither creditors do zulm on the debtors, nor the latter do zulm with the former (al-Baqarah.2:2) Second, paper currency does not come under the purview of the Qur’anic Ahkam. It is interesting to note that supporters of indexation routinely talk in terms of “lenders” and “borrowers”, i.e., they want to stay in the ambit of loan transactions while pleading for indexation. The zulm contention is answered at 10 above. The Sharj’ah position on the second point maybe seen as below.

11.3 According to the Ahkam on riba, all loans (debts) are to be settled on an equal basis in terms of the units of the object of loan (debt). In the case of paper currency, the exchange takes place by counting. Accordingly, the following conclusion would be drawn for loans (debts) denominated in, for example, rupees: if the sum lent (or debt contracted) amounted to Rs.1,000, the lender (creditor) can claim only one thousand rupees by counting— no more, no less.

11.4 The above argument may also be stated, again, in the context of the Ahkam on rib a, as follows:
i. The nature of a loan transaction, as stated at 3.2, does not change with inflation. So there are no grounds for changing the scope of the application of the Ahkam in inflationary regimes.
• ii. Lenders already incur transaction. costs associated with loan transactions (see above, 4.3). Inflation just escalates those costs. So there are again no grounds for changing the applicability of the Ahkam.
iii. A lender may get nothing if the borrower expires without leaving behind anything because debt is not transferable from one generation to the next through inheritance. Thus, reduction in value of loans and debts to zero does not represent a new situation, vis-a-vis the original Ahkam on riba, that merits special treatment.
11.5 The factual position about the other ground for indexation — putting an end to injustice to lenders and creditors — is clarified at 10 above. It can also be substantiated by noting that when Allah SWT directed the creditors to give grace period to debtors in a tight situation (alBaqarah 2:280), the extension was clearly with reference to the then existing debt obligations, not the inflation-adjusted principal in future.
11.6 In view of the above, there are no grounds for exempting loans and debts denominated in paper currency from the Ahkam on riba.
11.7 Despite the above analysis and conclusions drawn against indexation, there is no Shari’ah bar on taking remedial steps to neutralize the effects of inflation for loan and other debts created rough credit transactions. A general principle in this regard would be that not only the means but also the ends should be Shari’ah compatible. Keeping this in view, a recommended strategy would be to eliminate unanticipated inflation from the economy through prudent government policies, and to make anticipated inflation a part of decision-making by all concerned — keeping in view their seeds and other interests. Thus, for example, instead of there being a loan to a needy person to fulfil his consumption or business need, there may be either a bai’mu’ajjal or a partnership arrangement between the resource-owner and the needy party. While the need of the latter may be fulfilled, concerns of the former may be accommodated through the margin added to the deferred price or automatically adjusted through the realized profits.
Nature of Ahkam on Riba — A summing up

12. The Ahkam are binding for individual believers, any collective entity that represents them and their governments. They also apply to non-Muslim subjects of a Muslim state.

13. The prohibition of riba applies to both taking and giving of riba. This, in turn, implies-that regardless of whom one may be transacting with and where, that person or anyone representing him ought to respect the Ahkam on riba.

14. The Ahkam on riba essentially require that, generally speaking, all like-for-like exchanges he executed on an equal basis— in terms of the relevant units of exchange. If this does not suit someone, he is free to avoid such an exchange and to pursue an alternative permissible course of action.