Riba
The Quranic definition
By: A. Mohamed
The word riba (usury), an act that is prohibited by God in the Quran, has been subject to differing interpretations. The reason for the variation is that the majority of them are not entirely based on Quranic guidelines.
Since God states in the Quran that the Book provides us with the explanations of all things, we should expect to find the accurate definition of riba by using the Quran alone:
We brought the Book down to you providing explanations for all things. 16:89
If all scholars trusted in God's promise in 16:89, and sought to derive the understanding of riba from the Quran alone, there would have been only one correct interpretation.
The purpose of this article is to present the Quranic definition of riba and also to point out and expose all non-Quranic interpretations of this Quranic word.
Quranic guidelines
The Quran provides specific guidelines which enable us to have a clear understanding of riba. The Quran also provides the criteria that allows us to distinguish between what is classified as riba and what is not.
When we look at the word riba, and the verb yarbu, we find that they mean 'increase' and 'to increase' respectively. The word 'increase' is different from the word 'interest rate'. The Arabic word for interest rate is 'fa'ida' and not riba.
Not every increase in capital is riba. If that were the case then all kinds of trade and business would be riba and therefore prohibited. The Quran lists a number of guidelines that enable us to recognise what is an act of riba from what is not.
1- Trade is lawful but riba is prohibited:
Those who gobble up usury do not stand except as how one who is being knocked about by the devil's touch stands. That is because they said that trade is the same as usury. However, God has made trade lawful, and prohibited usury. 2:275
God allows trade, and an integral component of trade is financial gain. The Quran does distinguish between gains that are obtained from goods transactions and those obtained from money transactions. The gains that result from goods transactions as well as those that result from money transactions result in increases in capital. Such increases are called profits.
As we shall see, what makes a transaction an act of riba is not because it is a money transaction, but because certain conditions were present in the transaction.
In financial terms, money is considered a commodity. Money can be transformed to goods and goods can be transformed to money. All trade transactions are made with the intention of making profits. As long as the trade does not fall under the given Quranic categories, and as long as the trade is not related to goods that are prohibited by God, or prohibited activities, all trade is made lawful by God.
The outcome of the above is that it is not the increase in capital (profit, interest) that makes riba prohibited.
2- Excessive rate of interest:
The definition of the word usury in the dictionary is:
'An excessive premium for the use of money borrowed', or 'extortionate interest'.
The Quran confirms the same attribute of what can be classified as riba:
O you who believe, you shall not consume usury, doubled manifold, and reverence God so that you may succeed. 3:130
The immediate observation from 3:130 is that not all interest is prohibited by God. If that were the case, God would not have deliberately used the words "doubled manifold" which are mentioned as an attribute of "usury".
The current interest rates set by the established financial institutes in a country set the benchmark for what is fair, acceptable and lawful.
There are however those who prey on vulnerable borrowers. They offer them loans with very excessive interest rates. Such borrowers are usually ones who were refused loans by their banks for lack of security. When they need money urgently, say for medical treatment/surgery, they have no choice but to resort to such 'shark lenders' and accept such extortionate rates of repayment. Such loans are all clear acts of riba.
3- Transactions that are not based on mutual consent:
O you who believe, do not consume each others' money illicitly, but only engage in mutually acceptable trade. 4:29
The words in 4:29 set a second condition for what God considers lawful trade as opposed to being an act of riba. Lawful trade transactions are contracted through mutual consent. Transactions that are not based on mutual consent, but on the exploitation of one party of the other, are unlawful trade and fall under the category of riba.
4- Transactions that involve the exploitation of the needy:
If one is facing difficulty, he is to be granted respite to a time of ease, and if you relinquish it as a charity it would be better for you still, if you only knew. 2:280
When a borrower faces genuine difficult times which makes it difficult for him to continue with the payments of a loan, God recommends that the lender does one of two things:
1- Relax the terms of the loan or allow the borrower more time to pay back the loan.
2- Better still, to relinquish the outstanding part of the loan and consider it an act of charity. If the lender chooses the more righteous second option, God will indeed bless his money and expand his reward:
God condemns usury and expands the charities. 2:276
That which you give out with the intention of usury, aiming to gain increases out of people's money, does not gain anything with God, while as what you give as Zakat, seeking the Face of God; it is those for whom is given a manifold increase. 30:39
However, if the lender does none of the above, the loan he granted which may have initially been a lawful trade transaction, becomes an act of riba. The reason is that the act of exploiting a needy person is entered into the equation.
5- Accountability falls on the receiver of the riba and not the payer
The Quran contains strong confirmations that the accountability of riba lies on those who charge it (lenders) and not on those who pay it (borrowers).
1- Offender vs victim:
As per guideline number 2 and 4 above, for a transaction to be classified as an act of riba, the interest rate charged must be excessively high and it must also be an act of exploitation of the borrower by the lender.
Borrowers who accept to pay such excessively high interest rates, knowing that they are subject to exploitation by the lenders, are invariably borrowers who are in urgent need. Even though such borrowers are a party in the act of riba, yet they are the victims of riba and not the offenders.
One of God's merciful decrees is that He makes concessions for those who may be part of a wrongful act due to genuine urgent need. An example is given in 5:3 for one who is forced to eat one of the prohibited foods out of severe hunger. Such a person is not held accountable by God.
If one is forced through severe hunger, and without being deliberately sinful, then God is Forgiver, Merciful. 5:3
2- Accountability and punishment assigned to the receiver of the riba:
All the verses that prohibit riba address the one who charges riba (lender) and not the one who pays it (borrower).
Those (lenders) who gobble up usury .... 2:275
You (lenders) shall not consume usury. 3:130
If you (lenders) relinquish it (riba) as a charity it would be better for you. 2:280
That which you (lenders) give out with the intention of usury ... 30:39
Relinquish any outstanding usury that is owed to you (lenders). 2:278
Equally, the punishments mentioned in the above verses are assigned to the ones who charge riba and not the ones who pay it. There are no Quranic verses that ascribe accountability or punishment to the borrower who pays the riba.
6- Guidelines for believers to desist from charging riba:
O you who believe, reverence God, and relinquish any outstanding usury that is owed to you, if you are believers.
If you do not, then take notice of a war from God and His messenger. But if you repent, you may keep your capitals, and thus you do not wrong nor be wronged. 2:278-279
The above verses address those who have already committed riba or are committing it. When a loan or transaction is an act of riba from the outset, the lenders are instructed to reverence God and do the following:
1- Relinquish any outstanding riba that they are owed.
2- Once they repent, they can keep their capital. They can regain from the borrower the amount of money that was lent without the interest that was added.
Applications
1- Loans (Bank and private loans)
Traditional scholars of Islam have been quick to prohibit all loans as forms of riba. However, when we remind ourselves of the conditions for riba laid in the Quran, it can be said that such scholars could not have arrived at such a verdict by applying the Quranic rules.
The Quran does not prohibit loans. In fact, the Quran requires loans to be written down which is in itself a confirmation that God did not prohibit loans:
O you who believe, if you transact a loan for a specified term, you shall write it down. 2:282
There are no restrictions in 2:282 as to the purpose of a loan, which means that all loans are lawful. Without Quranic justification, the majority of Islamic scholars have divided loans into two types:
1- Personal loans, or consumers loans: these are loans taken out by individuals for their own personal use.
2- Production loans: these are loans taken out by individuals or by companies for the purpose of production.
They concluded that the first type of loans are forms of riba and thus are unlawful, while the second type are lawful.
How they arrived at this conclusion is unknown! Certainly not from the Quran!
As mentioned, the words in 2:282 do not state that some loans are prohibited and others are lawful.
2- Long-term loans (Mortgages)
These are long-term loans for home buyers. Such mortgages are usually repayable over anything between 15 to 25 years. The interest rate on the contract may appear to be low, however, the total interest to be paid back is compounded. This means that the total interest paid on the loan is substantial.
The compounded interest has led some to claim that such lenders are committing riba.
However, a close analysis proves this to be incorrect.
A normal loan is payable over a period of 2 to 3 years, while as mortgages offered to home buyers are usually over an average period of 20 years.
1- The lender is deprived of using his money for a period of 20 years and not the normal 2 to 3 years of ordinary loans. It is therefore justified that he is compensated for not being able to use or have access to his money for that long period of time.
2- A mortgage can be likened to a borrower who takes a 3 year loan, then at the end of the loan period would take another 3 year loan, and continues doing so for a period of 20 years. The aggregate interest he would pay for all the 3 year loans is not any different from the compound interest paid on a 20 year mortgage.
3- The borrower in the case of consecutive 2 year loans receives money every 2 years. However, in the case of a 20 year mortgage the borrower receives all the money upfront.
For those reasons, mortgages are not exploitive nor are they acts of riba.
3- Interest paid on 'Saving accounts'
Saving accounts which people open in banks pay interest to the investor. The interest in this case is paid by the bank and not the individual. Such accounts benefit both parties, the bank and the investor. There is no exploitation of one party of the other. None of the conditions of riba outlined in the Quran apply to saving accounts, and therefore they are lawful.
4- Durable goods that are paid for by installments
This is an arrangement for buying expensive durable goods such as cars for example. The buyer makes an initial down payment and pays the balance plus interest in installments.
Such purchases do not fall under the category of riba unless the interest rate charged is excessively high.
Buying goods and paying back by installments is not any different than taking up a loan and paying it back over a period of time. The only difference is that in the case of buying goods, the borrower receives goods, while as in the case of a loan, the borrower receives a lump sum of money. Both are repayable by installments over a period of time. These types of purchases do not qualify for any of the conditions outlined in the Quran for riba.
It often happens that trade transactions in consumer goods, durable and non-durable goods, can yield large profits. Do such profits qualify as acts of riba for being "doubled manifold"? This matter can be resolved in the light of the Quranic guidelines.
1- When God decreed that trade is lawful (2:275), God did not set an upper ceiling for what may be considered lawful and what is not. Therefore, the words "doubled manifold" do not apply to trade.
2- Gains made from trading goods (profits) are achieved through people buying, while as gains made from loans (interest) are achieved through people borrowing. The significance of this matter in relation to riba can be understood when we analyse the following two activities:
a- People buying overpriced goods such as designer clothes, collector's items, etc.
In order to incorporate the Quranic guideline of exploitation, which as will be shown holds the key in resolving this inquiry, we need to identify what category of people belong to each of the above two activities?
a- People buying overpriced goods:
b- People taking up loans with high interest rates.
Exception to the rule: Traders who make large profits from the sale of goods can only be committing riba if the element of exploitation is added to the equation. An example of such unlawful trade is that of those who exploit a shortage of an essential item (e.g. an essential food item) in the market in order to make huge gains. In such a case, the trader would be exploiting all categories of people, the well-off and also the low income people who also need to buy that commodity. There will always be this type of traders who deliberately ramp up the prices of essential commodities at times of shortages when the supply of such essential commodities is severely hit. Such traders are indeed committing riba
The representative APR (Annual Percentage Rate) is the rate which successful applicants for credit cards are given. Others with lower credit rating may be offered a higher rate if they are accepted.
In many cases, the APR charged is as high as 29.9% or even higher. Such rates are quite high in comparison to bank loans. In addition, the APR will not include charges for balance transfers, cash withdrawals, late payments and for going over the credit limit. In effect, the total interest the card holder actually pays could be much higher than the advertised APR. Once again, this excessive interest is a violation of the Quranic guidelines for lawful trade.
The other factor to note is that credit card interests are compound. The card holder does not only pay interest on the money he borrows over the course of a year. Instead, the sum he is liable to pay back would increase in year two – as the actual figure would need to include any interest added on to the original interest rate from the first year. This can make a big difference – especially when it comes to borrowing larger sums over a long period of time.
However, unlike loans with extortionate interest rates, there is a way to benefit from using a credit card yet eliminate the riba aspect of the card. This can be done by paying the full balance on the monthly statement immediately. That way, no interest is charged and the card holder pays no more than the annual membership fee.
5- Trade that yields large profits
It often happens that trade transactions in consumer goods, durable and non-durable goods, can yield large profits. Do such profits qualify as acts of riba for being "doubled manifold"? This matter can be resolved in the light of the Quranic guidelines.
1- When God decreed that trade is lawful (2:275), God did not set an upper ceiling for what may be considered lawful and what is not. Therefore, the words "doubled manifold" do not apply to trade.
2- Gains made from trading goods (profits) are achieved through people buying, while as gains made from loans (interest) are achieved through people borrowing. The significance of this matter in relation to riba can be understood when we analyse the following two activities:
a- People buying overpriced goods such as designer clothes, collector's items, etc.
b- People taking up loans with high interest rates.
In order to incorporate the Quranic guideline of exploitation, which as will be shown holds the key in resolving this inquiry, we need to identify what category of people belong to each of the above two activities?
a- People buying overpriced goods:
These will mostly be well-off people who have money to spare. No person living at or below subsistence level will spend his low income on designer clothes for example nor on overpriced goods in general when there are cheaper better priced alternatives.
As a result, this kind of spending will not be subject to being an exploitation of the needy (an exception is detailed below). The trader who makes profit from the sale of such overpriced goods cannot be accused of exploiting the needy; his buyers are not the needy. He is not committing riba.
b- People taking up loans with high interest rates.
The picture changes altogether when we examine the category of people who take up loans with very high interest rates. A person who is forced to take up a loan with an extortionate interest rate is one who is forced to do so. People with slender means and low credit ratings are likely to be refused loans by normal banks. For the bank, such applicants are not safe and secure investment. Such applicants, when in dire need will therefore resort to shark lenders at any cost to obtain their much needed loans.
In contrast, people who have good credit ratings would have no problem in securing loans from normal banks and at normal interest rates. They do not need shark lenders. The lenders (shark lenders) are therefore exploiting the urgent needs of poor people and they are therefore committing riba.
The significance of the above two activities is that large profits made from trading goods are paid for by well-off people. They buy such goods willingly, they are not exploited.
In contrast, people forced to take up very high interest loans are indeed people in dire need and they are being exploited.
Exception to the rule: Traders who make large profits from the sale of goods can only be committing riba if the element of exploitation is added to the equation. An example of such unlawful trade is that of those who exploit a shortage of an essential item (e.g. an essential food item) in the market in order to make huge gains. In such a case, the trader would be exploiting all categories of people, the well-off and also the low income people who also need to buy that commodity. There will always be this type of traders who deliberately ramp up the prices of essential commodities at times of shortages when the supply of such essential commodities is severely hit. Such traders are indeed committing riba
6- Credit Cards
The representative APR (Annual Percentage Rate) is the rate which successful applicants for credit cards are given. Others with lower credit rating may be offered a higher rate if they are accepted.
Even though charging a category of people a higher rate is for the purpose of securing the interest of the lender, yet it also entails a discrimination against borrowers with lower credit scores and who are usually the more needy. This policy is a violation of the non-exploitation Quranic rule of lawful trade.
In many cases, the APR charged is as high as 29.9% or even higher. Such rates are quite high in comparison to bank loans. In addition, the APR will not include charges for balance transfers, cash withdrawals, late payments and for going over the credit limit. In effect, the total interest the card holder actually pays could be much higher than the advertised APR. Once again, this excessive interest is a violation of the Quranic guidelines for lawful trade.
The other factor to note is that credit card interests are compound. The card holder does not only pay interest on the money he borrows over the course of a year. Instead, the sum he is liable to pay back would increase in year two – as the actual figure would need to include any interest added on to the original interest rate from the first year. This can make a big difference – especially when it comes to borrowing larger sums over a long period of time.
The following table gives a simplified example of the compound interest charged on £1000 borrowed over a 2 year period at an APR of 20%.
|
Borrowed Amount
|
APR
|
APR costs
|
Total repayment
|
|
Year 1: £1,000
|
20%
|
£200
|
£1,200
|
|
Year 2: £1,000
|
20%
|
£240 (200+40)
|
£1,440
|
However, unlike loans with extortionate interest rates, there is a way to benefit from using a credit card yet eliminate the riba aspect of the card. This can be done by paying the full balance on the monthly statement immediately. That way, no interest is charged and the card holder pays no more than the annual membership fee.
7- Stocks and shares
Some have claimed that trading stocks and shares is a form of gambling and since gambling is prohibited, thus any gains made from such transactions are unlawful and a form of riba.
Once again, the truth of this matter is analysed in the light of the Quran.
All kinds of trading in goods, which God allowed, include an element of risk and is therefore a gamble. No business activity is free of risk.
Let us consider the following example:
A merchant buys 1000 pairs of jeans from the Far East at a low price with the intention of selling the jeans in the UK at a higher price. He expects to make a gain on his capital. However, he has no guarantee that he will be able to sell the jeans at the price he calculated, nor in the period of time he estimated.
After making his purchase of jeans, he travels back to the UK to sell the jeans. He discovers that another trader has been selling the same brand of jeans at a lower price than the price he paid for his jeans. The other trader bought the same type of jeans at a cheaper price.
He is faced with two options: He could sell the jeans at a loss and cut his losses, or he can store them and hope to sell them at cost price when he is able.
The trader took a risk and he lost. However, nothing in what he did was in violation of the Quranic lawful rules of trade.
This example shows that the element of risk exists in all types of trades. The element of risk does not make a trade unlawful.
The one who buys company shares is not doing any different. He buys the shares in the hope of selling them at a later date at a profit. The shares he bought are not any different from any other item that is bought and sold.
The element of risk was an integral part of the activities of both types of trade.
Why does the Quran not set a minimum rate above which interest becomes riba?
The Quran does not set a ceiling above which an interest rate becomes an act of riba because there is no such thing as a rigid unchanging interest rate that suits all countries, and at all times. Interest rates fluctuate in harmony with the economic climate of the country. This is reflected in the strength of its currency and the stability of its economy. At times of recession for example, interest rates are kept very low, and vice versa.
Today, in most countries which follow a free economy, interest rates are usually set by the Central Bank. The flexibility and changing nature of interest rates are the reasons why there is no set rate in the Quran.
Riba misconceptions and non-Quranic rulings
1- Riba vs interest
As mentioned above, even though the root of the word riba means 'increase' yet the Quran outlines strict conditions as to which increases fall under riba and which increases are lawful. To interpret the riba as increase in an absolute sense is to disregard the Quranic conditions mentioned above.
If all interest on loans are classified as riba, and therefore prohibited in a country, and only loans without interest are allowed, then no person nor institute would lend out loans. Why would they do so if they would not make any gains. Some individuals may wish to seek the Face of God and be charitable, but it is unrealistic to expect institutes like banks, with all their expenditure and wage bills, to be charitable!
If loans are deemed unlawful and thus prohibited, whole economies would come to a standstill. All firms and companies that depend on loans to operate and produce would go out of business.
In addition, as demonstrated above, God made trade lawful and a basic ingredient of all trade transactions is gains and increase in capital. The conclusion is that not all interest is classified as riba.
2- Variable interest vs fixed interest
Some scholars have come up with yet another stipulation, and once again without Quranic reference. They stated that a fixed preset return on an investment is unlawful while a floating return that is not preset is lawful.
Needless to say, there is nothing in the Quran that directly or indirectly endorses this ruling.
3- Returns on investments and deposits are lawful only when paid by Islamic banks?
The same ulama and scholars, who derive their fatwas from non-Quranic sources, claimed that the returns on deposits are halal only if paid by Islamic banks.
Primarily, the banking system as we know it today did not exist at the time of the revelation of the Quran, so to speak of Islamic banks as being the halal type of banks is without any Quranic reference.
Secondly, there is nothing in the operation of ordinary banks that violates the Quranic guidelines above. Banks are reputable lending institutions; they provide numerous beneficial services to the community. The following are some of those services:
1- They make money available for the people for numerous purposes, such as home improvements, car purchase, medical expenditure, etc.
2- They make money available for various businesses and service firms.
3- They offer a safe place to deposit one's money.
4- They provide employment to thousands of workers.
5- They increase the productivity of the society by increasing the circulation of money.
6- They offer safe means of investing one's capital in the form of saving accounts. This is particularly beneficial to old people who are no longer able to work to earn a living.
Scandal of Islamic investment companies
During the late 1980's in Egypt, a number of so-called Islamic investment companies sprung out and started inviting the public to invest with them. The largest of those companies was Al-Rayan. The advertising campaign they pursued to attract deposits was based on three selling points:
1- Ordinary bank deposits that paid interest were unlawful since all interest is riba, while as Islamic investment companies (such as them) that paid a share of the dividends, in profit-and-loss, were lawful in Islam.
2- They promised a 5% monthly return (60% annually)! That was considerably higher than the interest paid by normal banks at the time.
3- They promoted themselves as "Islamic" banks.
In essence, the message they portrayed to the average investor was: If you invest your money with an ordinary bank, your return is a form of riba and is therefore haram. But if you invest your money with us, your return is Islamic and halal.
The bait was very swiftly snatched up! A huge number of hopeful gullible savers deposited their savings, often their life savings, with such companies. In the first year or two, these companies paid out returns as promised. It was later realised that such a policy was to lure more investors. The ploy was carefully worked out. So much so that what these companies were receiving in new deposits comfortably exceeded the returns they were paying out.
As expected, the unrealistic 5% monthly return was impossible to sustain in the long-run. After the companies secured a huge sum of deposits, estimated to be in the billions of American Dollars, they stopped paying out any money (interest or original capital) to their investors. Hundreds of thousands of middle-class Egyptians saw their modest savings disappear at the hands of such fraudsters.
This, together with the public rage, ultimately led to a government inquiry into the dealings of such companies. A strong crackdown came down upon them, and the figureheads of those companies received long prison sentences. Nevertheless, it was all too late. Much of the deposits were already transferred to untraceable foreign accounts. The investors never got their money back.
The strange thing is that the same deception was repeated in 2015, again in Egypt, and many gullible people fell for it once again!
Conclusion
For riba to exist there must exist a number of Quranic conditions which were presented above. If none of these conditions exist in a transaction, then there is no justification in labelling such a transaction an act of riba.
It is a sad fact that various scholars, imams and ulama have taken the liberty of prohibiting a number of lawful economic activities by branding them as acts of riba. God strongly warns against prohibiting what God never prohibited:
Do not utter lies that are portrayed by your tongues: "This is lawful and that is unlawful," to fabricate lies and attribute them to God. Those who fabricate lies and attribute them to God will not succeed. 16:116
Those who take the liberty of prohibiting what God did not prohibit do so in violation of the law in 6:114 where it is clearly stated that God is the only lawmaker:
Shall I seek other than God as a lawmaker when it is He who has brought down to you the Book fully detailed? 6:114
In addition to 6:114, the deliberate use of the word "partners" in 42:21 tells us that those who take the liberty of playing the role of a lawmaker in matters of religion are indeed committing an act of shirk (associating partners to God):
Or do they have partners who legislate for them of the religion what God did not authorise? If it were not for a decisive Word, judgement would have already been passed over them. Indeed, the transgressors shall have a painful punishment. 42:21