Why Interest Is Prohibited?

WHY INTEREST IS PROHIBITED RIBA?

AN ECONOMIC PERSPECTIVE

Ismail Nizam

SUMMARY

[The article begins with a brief introduction which states the shari'ah standpoint on the issue of Interest-Riba equivalence as a dispute settled in the history of Islamic scholarship. It also provides a snapshot of the Ummah's awareness on the subject of Riba and its prohibition in primary sources of Islamic Shari'ah. This Ummatic level awaress is followed by a short, yet true description of our society's attitude towards Islam, interest and Riba. The reasons for Riba consumption in our society are heighlighted. The whole article is focused on a single form of interest, i.e, interest on loans. Other forms of interest are deliberately excluded from the discussion. Individual concepts within the title are discussed and clarified before the elaboration on the subject as a whole. The terms interest and Riba are explained as concepts in both theory and practice with examples. The details of Riba prohibition are explained with authentic Shari'ah sources. It distinguishes the kinds of loan that is encouraged from that which is forbidden. Finally, the subject as a whole is discussed by providing economic evidences, and facts. The question in the titled is answered with economic arguments, logic, and facts. The key points are summarised in the conclusion, and the needed future effort on this subject are described briefly].

INTRODUCTION

The issue of Interest-Riba equivalence is now undisputed among Islamic scholars. It is a dispute that was settled a long time ago in our Islamic scholastic history. It is arrogance to go around confusing the issue. The Ummah would probably have heard the statement " interest is Riba ". Majority of Ummah's populace is also likely to have come across with Qur'anic verses and Hadith of Prophet (may peace be upon him) on the prohibition of Riba and punishment for those who violate the prohibition. As a result, freeing banks from interest (Islamic banks) is a growing trend in various places of the world.

However, there is not a single Islamic bank in our society. The whole economy is built on Interest based banking. Our people are generally faithful to religion. The reason why our people are not moving away from interest is not because they do not love Islam, nor because of disregard to the Qur'anic verses on Riba prohibitions. There are primarily two reasons. Firstly, our people are not well educated on this subject. Secondly, they are in confusion due to the critics of Interest-Riba equivalence. As a result, there are unanswered questions in their mind. Why is interst considered to be Riba? What alternatives do Islam provide? If these questions can be answered with proper evidences, logic and facts, it will, Inshaa Allah, be an important first step towards Islamic banking.

In this article, I will try to answer the question in the title from an economic perspective as indicated in the title. Prior to answering the question, there is a need to explain few concepts. A person cannot agree to a statement that interest is Riba without knowing the meaning of interest and Riba--a pre-requisite for knowing the similarity. The term interest throughout this article is taken to mean only loan interest. My focus is not on other interests, for example interest on deposits.

CONCEPTS EXPLAINED

INTEREST

Interest can be defined as (investorwords.com) the fee charged by a lender to a borrower for the use of borrowed money, usually expressed as an annual percentage of the principal; the rate is dependent upon the time value of money, the credit risk of the borrower, and the inflation rate. Here, interest per year divided by principal amount, expressed as a percentage, also called interest

The two major forms of interest in the financial world are simple interest and compounding interest. Simple interest is calculated on the original principal only. Accumulated interest from previous periods is not used in calculations for the following periods. Compound interest is calculated each period on the original principal and all interest accumulated during past periods.

Consider a simple loan example;

A person borrows Mrf50, 000 at 10% interest for a period of 10 years. The annual repayment is Mrf8,137.27. The total interest payment over 10 year period will be Mrf31,372.67. A person who borrowed Mrf50, 000 would end up paying Mrf81,372.67 as repayment (interest plus the principal). There is a 63% increase between amount borrowed and amount repaid.

It is to be noted that modern banks charge usually a percetage higher than the rate in this example. The compounding frequency can also differ from bank to bank and sometimes from loan to loan (Some more examples are illustrated later in this article).

RIBA

The term Riba literally means increase, addition or growth. However, it is not every increase or growth, which is prohibited Riba. The technical meaning of Riba in Shari'ah is the "premium" that must be paid by the borrower to the lender along with the principal as a condition for the loan or for an extension on its maturity. The term Riba is mentioned twelve times in four Surahs of the Holy Qur'an, all in the opposite sense to trade and charity. Islamic shari'ah identifies two types of Riba; Riba An-Nasi'ah and Riba Al-Fadl.

Riba Al-Nasi'ah

This form of Riba is called as Riba Al-Qur'an. The word 'nasi'ah' is derived from the word 'nasa'a', which means to postpone, to defer or to wait. Technically, Riba An-nasi'ah means bringing to the lender a fixed increment after an interval of time, or extension of time over the fixed period and increase of credit over the principal. In simple terms, it can be explained as the time that is allowed for the borrower to repay the loan in return for an "addition" or a "premium". Therefore, it means the interest paid on (or gained by) loans as practiced by conventional banks today. This form of Riba is prohibited in the Qur'an in 30:39, 4:160-1, 3:130 and 2:275-281. The hadith of the Prophet (may peace be upon him) states (translation);

"Narrated from Jabir said that Allah's messenger (may peace be upon him) cursed the accepter of interest and its payer, and one who records it, and the two witnesses, and he said: They all are equally guilty." (Muslim, also in Thirmidhi and Musnad Ahmad)

The injunctions